Asia Tea Time - Cup 68 ☕

This week I talk the lower yield on Singapore’s 6-month T-bill and understanding our biases if we’re building a “war chest” for investing. 

Macro in Asia

Singapore’s 6-month T-bill cut-off yield drops to 3.13%

In Singapore, the go-to risk-free asset – Singapore’s T-bill – saw the cut-off yield on its latest 6-month issue decline to 3.13% from the 3.34% in the previous 6-month auction that closed on 15 August 2024.

Why it’s happening

• There are multiple pockets of weakness starting to show up in the global economy – particularly in the US, where the jobs market is starting to slow down.

• Given policy from the US Federal Reserve (Fed) – the US central bank – has such an impact on global asset prices, it’s no surprise that T-bill yields in Singapore are falling. 

• Remember that since the last auction on 15 August, there has been a Fed gathering at Jackson Hole, where Chairman Powell all but confirmed that there will be an interest rate cut in September. 

Why it matters

• With interest rates in the US set to fall, it means the returns (or yield) on risk-free assets everywhere will come down with the US’s own 10-Year Treasury yield.

• If yields start to fall on things like T-bills in Singapore or Treasuries in the US, investors are much more likely to put their money into assets (like stocks or even bonds) that can give them a potentially higher return. 

What’s next?

• Watch out for the US jobs report next Friday (6 September) as a lower-than-expected number could even raise the prospect of a 50 basis point (bp) cut of interest rates at the Fed meeting in September. 

Tim’s Take 

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In Singapore, yields on risk-free assets – like the T-bill – have always been slightly lower than yields on risk-free assets in the US, such as Treasuries. That’s mainly down to a more stable Singapore dollar and a local economy that is faring relatively better than the US economy.

But the latest Singapore T-bill auction does highlight how much US Fed policy still resonates for the local economy. If we go back to December 2022, the Singapore 6-month T-bill cut-off yield was up at 4.4%.

Now down more than 120 basis points at 3.13%, yields have accelerated their downward trend since about June, when you could have got a 6-month T-bill at 3.76%. 

Unsurprisingly, that has coincided with falling inflation numbers in the US as well as weakening jobs data – all of which have made the market believe that interest rate cuts are coming soon.

And so they are. The market is now pricing in a rate cut at the Fed’s September policy meeting on 17-18 September. 

While there’s still one employment report and an inflation reading to come, the general direction for yields of risk-free assets – both in Singapore and the US – seems unlikely to deviate from their downward trajectory. 

Tim’s money tip of the week

We should all have that emergency fund. You know, the one with 6-12 months of our monthly expenses (in cash or cash-like instruments) in case we lose our jobs or have some emergency that we need to finance.

But that emergency fund shouldn’t technically be an excuse to sit on more cash than is necessary. Some investors like to have a small “war chest” to take advantages of market declines, in either stocks or market ETFs.

While that’s certainly commendable and allows us to hold some extra “dry powder”, it’s worth remembering that it’s also (in a way) us timing the market. With global stock markets approaching all-time highs, it’s tempting to sit on the sidelines and just “wait” for that inevitable drop.

And we don’t ever want to do that. JPMorgan Private Bank examined market data on the S&P 500 Index going back to 1970. What they found was that, on average, one year after investing at a new record high, the S&P 500 was up more than 70% of the time. 

So far in 2024, the S&P 500 has recorded close to 40 record highs. Right now, it sits only 0.3-0.4% off its record. So, while it is tempting to “time the market”, we should be prudent about how much dry powder we keep in store for that totally hypothetical market meltdown.