As you would all have observed – T-Bills yields are falling.
The latest T-Bills yields closed at 3.06%, which is the lowest it has been since late 2022 (more than 24 months ago).
For Singapore investors, we have been enjoying high interest rates risk free just “chilling in T-Bills”.
But with falling interest rates – how to earn attractive yields on cash in today’s climate?
One option is fixed income (bonds).
Why are short duration fixed income (bonds) attractive in today’s climate?
Short duration fixed income (1 – 3 year duration) is an attractive option in today’s climate.
Reason being that in a rate cut cycle, short duration fixed income allows you to “lock in” interest rates, such that you continue to enjoy attractive yields even after Fed rate cuts.
And yet you don’t take on too much duration, that you suffer huge capital losses if interest rates go up (compared to a 10-year bond for example).
In my view, a 1 – 3 year duration forms the sweet spot in allowing you to lock in rates for a longer duration (compared to T-Bills), and yet not too much duration that you can suffer big capital losses if rates go up.
So it was of great interest to me to learn that POSB is offering several short duration fixed income solutions.
One solution that investors may wish to consider is the SaveUp Portfolio:
“As of end Aug 2024, the portfolio’s model characteristics were as follows: yield-to-maturity stood at 5.0%, with a duration of about 2.0 years. It has an average credit rating of A with high yield allocation below 10%.”
A portfolio with an average duration of 2.0 years, relatively decent credit rating, 5.0% yield to maturity and invested via DBS/POSB Bank.
Sounds very attractive, so