Experts highlight Treasury bills and short-term government securities bonds as viable low-risk investment options alongside fixed deposits and Singapore Savings Bonds.
SINGAPORE: As interest rates on fixed deposits rise, many investors are drawn to these safe returns, with some customers enduring long waits to secure attractive promotional rates offered by various banks.
While investing in fixed deposits seems appealing, several low-risk alternatives deserve consideration. Among these are Singapore Savings Bonds, which have recently experienced high demand, and short-term Singapore Government Securities (SGS) bonds, recommended by some experts as a good alternative to holding cash.
Before deciding where to invest, it’s crucial to evaluate and compare options that present similar risks, according to Tan Chin Yu, a senior client adviser at Providend. “While the higher rates on fixed deposits are attractive, they should be compared with similar instruments such as Singapore Savings Bonds, Treasury bills, or short-term SGS bonds,” he advised.
Understanding T-Bills and SGS Bonds
Like Singapore Savings Bonds, Treasury bills (T-bills) and SGS bonds are debt securities issued and backed by the Singapore Government. These domestic securities serve various purposes; for instance, Singapore Savings Bonds provide retail investors with a flexible and risk-free investment option.
T-bills, which have maturities of one year or less, and SGS bonds, with durations ranging from two to 50 years, are intended to develop the debt market. Recently, all three types have experienced rising yields, mirroring trends seen in major economies as global central banks engage in rate hikes to combat inflation. Among them, T-bills currently offer the highest return, with the latest six-month T-bill yielding 3.32 percent—up from 0.48 percent in January. Similarly, one-year T-bills have seen returns increase from 0.75 percent to 3.1 percent.
In comparison, the most recent two-year SGS bonds issued offered a coupon rate of 2.7 percent, while five-year bonds released earlier this month returned 2.92 percent. The interest rate for Singapore Savings Bonds, which has dipped since peaking at 3 percent in August, now averages 2.75 percent over ten years for October.
Evaluating Pros and Cons
Given their higher yields, T-bills and short-term SGS bonds are attractive options for investors aiming to generate returns amid market volatility, say financial advisers. Fully backed by the government, these securities are generally considered safe investments. Additionally, investors are more likely to receive the full amounts they apply for, unlike Singapore Savings Bonds, which have seen limited allotments due to heightened demand, noted Elijah Lee, an associate financial services manager at PhillipCapital.
The Singapore Savings Bonds have a limit of S$200,000 per investor across different tranches, but for the August issuance, the ceiling for applications exceeded the issuance size was S$9,000. In contrast, investors can apply for up to S$1 million for each T-bill and S$2 million for each SGS bond. Typically, retail investors will receive the full amount they apply for.
Moreover, there are no penalties for liquidating a T-bill or SGS bond before maturity. However, Tan cautions that selling in the secondary market may expose investors to the risk of capital losses. Both T-bills and SGS bonds are tradable debt securities that can be bought or sold before maturity, though their prices are sensitive to interest rate changes; as rates rise, bond prices generally fall, and vice versa.
While liquidity may pose challenges if there are few buyers, Lee warns that the bond market does not function like the stock market, making it potentially difficult to find buyers. “You may have to sell at a steep discount, but it’s likely you wouldn’t want to take such a loss and would choose to hold on instead,” he explained. He also added, “While six months for a T-bill might seem short, it can feel long if you find yourself in a tight spot.”
Upon maturity, Lee, who specializes in retirement strategies, emphasized that investors will need to seek out new investment options and face potential interest rate risks. Using a six-month T-bill as an example, he noted, “While the rates are attractive now, what happens after six months? You’ll need to hope the rates remain favorable each time you renew.”
To Invest or Not?
When deciding whether to invest in T-bills or short-term SGS bonds, experts recommend looking beyond just the yield. “Investors should always consider their time horizon; generally, the shorter the horizon, the lower the risk one should take,” Tan advised. In this context, investors might consider T-bills or short-term fixed deposits over SGS bonds with longer maturity periods.
Additionally, it’s essential to consider the liquidity of the investments, meaning how quickly access to capital can be achieved and any associated risks. “It’s best to plan the timeline for when the money will be needed and then invest accordingly,” he suggested.
Key Considerations for Investing in T-Bills and SGS Bonds
Both SGS bonds and T-bills require a minimum investment of S$1,000, with additional investments in multiples of S$1,000. However, the returns differ: SGS bonds pay a fixed interest rate biannually, while T-bills are issued at a discount, with investors receiving the full face value at maturity.
Both securities are auctioned off with competitive and non-competitive bidding options. For retail investors, particularly those new to T-bills and SGS bonds, a non-competitive bid is often the best option. “Retail investors have limited influence on price and must accept the market price, while larger institutions primarily set the price,” said Tan.
When considering whether to utilize cash or funds from one’s Supplementary Retirement Scheme (SRS) or Central Provident Fund (CPF), Lee recommends using spare cash and SRS funds first, as they yield very little.
Conversely, Tan suggests that since SRS funds cannot be accessed without penalty until the statutory retirement age, they might be better utilized in equities to protect against inflation.
With funds in one’s CPF Ordinary Account currently earning 2.5 percent, T-bills may provide a more attractive alternative for earning higher returns, although investors will need to visit a bank branch to apply. Currently, online applications for T-bills are limited to cash and SRS funds.
When asked for his preference, Lee stated that investors seeking risk-free options should prioritize Singapore Savings Bonds due to their favorable balance of liquidity and decent returns. Investors can redeem the savings bonds at any time, even though they come with a 10-year maturity term, with no penalties and accrued interest remaining intact.
The interest rate for the next tranche of Singapore Savings Bonds may also rise, given that average SGS yields have increased this month following a dip in August. While T-bills remain a solid option for those reserving funds for near-term expenses, such as a house down payment, they are not without their challenges.
Ultimately, with returns from lower-risk options unlikely to outpace inflation, investors should adopt a long-term perspective, potentially including riskier assets like equities in their portfolios. “Different goals require different strategies. Some goals are immediate, while others are for the long term. If your goal is long-term, find the right asset class for that time frame,” advised Lee.
“It may sound like general advice, but it’s vital to evaluate all your assets and understand what the money is intended for.”
Editor’s note: An earlier version of this article mistakenly stated that T-bills and SGS bonds could be bought or sold on the Singapore Exchange. Only SGS bonds can be traded on the Singapore Exchange. We apologize for the error.
