Singapore 10-year bond yield is at 2.73% now and a 5y high. One year ago, it was at 1.99%. The increase might look small in terms of numbers but a butterfly effect exists – yield changes affect all other investments.
Singapore doesn’t manage the interest rates but the Singapore Dollar exchange rate against a basket of currencies. USD is one of the currencies that the Singapore Dollar is benchmarked against and thus Singapore has been inheriting the rising interest rates from the US.
With more rate hikes in the US, Singapore bond yield is likely to go up further.
Let’s do a thought experiment and assume that the Singapore 10-year bond yield hits 5%. How would this change the financial landscape?
REITs will underperform. Most investors buy REITs because of its high dividend yield. The more popular REITs have saw price decline as the bond yield climbed. These REITs are yielding 5% and more currently.
If the SG bond yield is at 5%, REITs are not going to be attractive investments at 5% dividend yield. This is because the SG bonds are relatively safer investments. Some investors are likely to dump REITs and buy the bonds. Why take more risk for the same return?
The REIT yield has to be higher than the bond yield to justify for the additional risk. Hence REIT prices should fall for the yield to go up to say 8%.
This will apply to all other dividend yielding stocks in Singapore. I picked REITs because they are generally higher yielding instruments and would hence suffer a bigger impact from rising bond yields.
Those who have existing Singapore bonds would see capital losses. This is because bond prices move opposite direction to interest rates. The newer bonds are being issued at higher interest rates and to make lower-coupon bond attractive to a buyer in the secondary market, it has to be sold at a discount such that the yield-to-maturity matches the prevailing coupon rate.
Singapore Savings Bond (SSB) is an exception because the bond price is always fixed at par. And its interest rates would rise in tandem with the SG 10y bond yield.
With both stock and bond prices going down, diversification wouldn’t save a portfolio this time. Assuming you built a portfolio consisting of STI ETF for stocks and ABF Bond ETF for bonds in a 50-50 allocation, you would have lost 5.7% year-to-date (STI ETF is up 2.4%, ABF Bond ETF is down 8.1%). One would have to wait past the inflationary period to see the diversification work again.
We should expect banks to increase the interest on all savings accounts but they will delay it as long as possible or increase as little as possible. But once one bank raises the rest are likely to follow in order to keep customers.
But it is more likely the loan rates will increase first and at faster rates. Be it business, car or mortgage loans, all are expected to rise. It is already happening – the 3-month SIBOR rate in April 2022 has doubled since Jan 2022. This would reduce consumption of high-value goods that needed loans and affect business growth. In turn, it lowers the GDP growth of Singapore.
Hence, don’t belittle the rising bond yields that is happening now. It will impact all our lives one way or another.
