We all know inflation is driving up the cost of living. And stock market uncertainty has pushed many investors to the verge of capitulation. 2022 has been a horrible year for investors because whether you invest in stocks or bonds, you most probably have ended up losing money.
As you can see from the chart below, even a diversified 60/40 portfolio has suffered the worst YTD return in the past 100 years.
There is a saying that cash is king in a stock market crash. But even if you were to hold cash, you would still hope to earn a higher return. In this article, we will talk about “cash alternatives”.
What are Cash Alternatives?
Cash alternatives often refer to investment options where you can earn a higher rate of return than your savings account. But if you understand the world of finance you realize that there is no free lunch. There is always a trade-off. In this case, you will trade your liquidity and take some credit risks for a potentially higher return.
When the interest rate was low during the past decade, I have repeatedly talked about adding a Short Duration Bond to your portfolio which has served my clients well.
But since the interest rate has been hiking rapidly, even short-duration bonds started to lose money due to the inverse relationship between bond prices and interest rates. That is why one year ago I advised my clients to sell off all their bonds and move to Money Markets in anticipation of a rising interest rate environment.
In this article, I will explain 4 cash alternatives you can consider now…
Cash Alternative #1: Money Market Funds
The money market is not familiar to many retail investors because it is an institutional arena.
But the money market is one of the pillars of the global financial system. You can think about it as the liquidity pool between the banks and governments to ensure there are cash flows.
The money market consists of very short-term debt investments. At the institutional level, it involves large-size transactions between institutions and traders.
But the good news is that retail investors can gain exposure to the money market via mutual funds (a.k.a. unit trusts).
A money market fund may not sound cool to many investors, but in today’s environment, it is a very good option to look at now. I will compare it with other options later.
Cash Alternative #2: Singapore Government Treasury Bills (T-bills)
Singapore is one of the few countries that still has a AAA credit rating. So there are always demands whenever the Singapore government issues bonds.
The Singapore government issues short-term bonds called T-bills with both 6-month and 1-year durations. These are the shortest-tenured Singapore Government Securities (SGS) available.
T-bills have garnered huge interest recently because the yield has raised rapidly. If you look at the Treasury Bill statistics, the rate jumped from 1.69% in May to 4.19% in October. It means the rates raised nearly 2.5 times in less than half a year.
If were to chart these data, you can see that the T-Bill yield only comes down a bit in Nov 10 auction due to high demand.
But I want to caution you that T-bill is auction-based. With more and more people aware of this instrument, the current level of yield may not sustain. The latest 6-month Treasury bill auction on November 10 drew a record 92,000 bids totalling S$14.2b. That is likely the reason why the yield is lower than the previous auction.
Cash Alternative #3: Singapore Savings Bonds
Singapore Savings Bonds (also known as SSBs) are another safe and stable product offered to individuals by the government. The investment period goes up to 10 years. Since launching in October 2015, it has gained popularity. The bonds pay a step-up interest rate each year, up to the 10th year. In other words, the bonds have a lower yield earlier in their tenure, but progressively pay a higher interest rate or coupon until the bond’s maturity date. This means that the longer you save, the higher the return.
One great advantage of the SSB is that you can redeem it earlier without penalty. Unlike Singapore Government Bonds (which we will talk about next, which you need to sell at the market value), you get back your principal in full when you redeem the SSB.
Cash Alternative #4: Singapore Government Bond
There is another type of Singapore Government Security (SGS). This one is called the Singapore Government Bond (SGB). These bonds are normally for a longer period, ranging from 2 to 50 years.
Like other bonds, they pay on a fixed coupon every 6 months. Although the bond yield has risen in recent months (left chart), the bond price generally suffered a big loss if you bought it too early. But if you foresee that the rate hike slows down, there could be good capital appreciation opportunities on top of the coupon payment.
So which one should you choose?
If you understand each of these securities, you will realize they have their own trade-offs.
In general, low liquidity may offer you a higher return and short-term instruments may potentially give you a lower yield. But as strange as it sounds, the market is rather distorted now.
- Daily liquid Money Market fund – 3% plus annualized return (based on the 7-day annualized yield)
- 6-month T-Bill (4% yield) (based on Nov 10, 2022 auction)
- 10-year Singapore Savings Bond – 3.47% average compound return based on 10 years tenure (based on coming Dec 2022 Issue)
- 10-year Singapore Government Bond – 3.28% coupon (based on Sep 28, 2022 issue)
As you can see, the yields between the money market, short-term bonds and long-term bonds are very close. This is because the yield curve (as shown in the chart below) is inverted due to the fast and furious rate hikes this year.
So what does this mean for investors?
Don’t chase fixed returns.
When the stock market is bad, it is natural for investors to turn to safe-haven assets.
Nowadays there are a lot of “interest rate experts”. Many financial bloggers, YouTubers and TikTokers have been advocating that you should lock in your money for fixed returns.
This is Déjà vu advice and reminds me of the time when REIT prices were good, everybody was rushing to buy Singapore REITs, only to be stuck in that investment for the next few years.
- Investing for Retirement: Why you should not over-rely on REIT investments (2019 Feb)
- REIT Investing for Retirement: Why you can still suffer massive loss (2019 July)
It is easy to understand the basic concept that you shouldn’t buy stocks if they are overvalued, but it is not natural for fixed-income investors to avoid overvaluation when they look at cash alternatives. Retirees and fixed-income investors are often too focused on headline yield and overlook the macro backdrop and opportunity cost.
I didn’t talk about these three types of securities over the past few months for the simple reason, it was too early to buy them. If you foresee that the rates are hiking, why rush to buy if there is a high chance that the next tranche will give you a better deal?
Why am I bringing up this topic now?
If we look back at the yield curve chart again, we need to ask ourselves: Is this going to continue?
In my Telegram channel, I have talked about the high chance of the Fed pivoting. People don’t understand that when the Fed raises rates, they can only raise the short-term rates. Long-term rates cannot be sustained at a lower level compared to short-term interest rates simply due to the time value of money.
You need to be aware that such a parabolic rise in interest rates is a rare event. It is not normal.
Knowing how to buy T-Bills doesn’t give you a free pass to earn a 4% return every year.
And I don’t think it is wise for stock investors to sell at this level and switch to income instruments like this. A 3% to 4% yield with a capital guarantee may sound good when people are losing money in the stock market. But when the market recovers, it is often too late for you to take the necessary action. As John Templeton famously said,
Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.
This cycle applies to both the stock market and the fixed-income market.
In my opinion, I think there is a chance that interest rate hiking is about to peak in the near term and you and T-bill investment looks like a good way to lock in the rate for the next 6 months. But don’t forget the opportunity cost.
What if the stock market started to recover? Is a 2% return in 6 months still attractive? That is why I think for most people, a money market fund can be one of the good alternatives.
The money market has a role to play in your portfolios because it is liquid and can earn a competitive interest than a savings account when you are waiting for the next investment opportunity.
If the interest rate continues going higher, your fund should deliver the corresponding return. When the stock market starts to recover, you can quickly switch it back to equities.
How to buy a money market fund
With the advancement of technology, purchasing a money market fund is readily available for retail investors.
You can get it from your advisers (do ensure there is no sales charge or commission) or you can buy them from many online platforms.
For example, if you look at the Money market fund in the Moomoo platform, Fullerton SGD Cash Fund has a 3.4263% based on a 7-day annualized yield and CSOP USD Money Market Fund has a 3.22% based on the last 7-day annualized yield.
How to subscribe to a Money Market Fund on the moomoo platform
Step 1: Go to “Trade”, click “Money Plus”
Step 2: Click “Cash Plus”
Step 3: Select the fund you want to buy and click “Subscribe”
Or you can use “SmartSave” to automatically allocate a balance of SGD and USD to the money market fund.
Moomoo SG’s 5%* Guaranteed Rewards promotion
I want to talk a bit more about the latest 5%* guaranteed reward promotion by Moomoo SG. (*refer to the full terms and conditions)
It may seem to be too good to be true so I have clarified with moomoo SG
- Users will invest into a base money market fund of their choice and moomoo SG will make up for the difference to ensure that eligible users enjoy a guaranteed return of 5% p.a. on their principal subscription.
- It applies to new moomoo SG users who have not opened a moomoo SG universal account and/or deposit before 1/11/2022 (click here to sign up)
- The maximum subscription is capped at S$10,000 per user.
- The promotion is for a limited time and limited users.
- The max duration of the return reward matching is 4 months if you sign up during the prelaunch period from Nov 1 to 16 Nov 2022 and 3 months if you sign up from 17 Nov 2022 to 31 Dec 2022.
Let me summarize…
In a chaotic world like we have now, it is important to ensure your assets are probably diversified. I think you shouldn’t be too conservative or too aggressive. The trick is to ensure proper risk allocation and ample liquidity to be prepared for when opportunities arise.
There are 4 cash alternatives you can consider now:
- Money Market Fund
- Singapore Government T-Bills
- Singapore Savings Bonds
- Singapore Government Bonds
Each instrument has its pros and cons. It is like choosing between a floating-rate mortgage loan or a fixed-rate mortgage loan.
- A money market fund has floating returns
- T-bills have fixed returns but come with a lock-in period.
- SSB has a lower return in the earlier years.
- SGB’s price may drop should interest rates continue to go higher.
Which one do you prefer? Leave your comment below.
Disclaimer: All views expressed in the article are the independent opinions of the author. Neither moomoo Singapore nor its affiliates shall be liable for the content of the information provided. This advertisement has not been reviewed by the Monetary Authority of Singapore.