Singapore’s central bank, the Monetary Authority of Singapore (MAS), has announced that it will pause its monetary tightening measures. This has caused two-year Singapore government bond yields to fall from 3.2 percent to 3.0 percent over the past month.
In contrast, two-year US Treasury bond yields are currently trading at around 4.0 to 4.5 percent, while 10-year Treasuries are around 3.5 to 4.0 percent, which are multi-year highs.
The US inflation numbers released last week did not bring any surprises, and the markets are now more convinced than ever that the next rate hike will be the last in this cycle. The Fed’s latest rate projection has kept the peak interest rate unchanged at 5.1 percent by year-end.
This means that US interest rates are now very close to their peak, with many people expecting just one more 0.25 percent rise in May.
The MAS has decided to pause it’s tightening measures due to the risk of a deeper-than-anticipated economic slowdown globally and in Singapore. While a rate cut later this year is not the Fed’s base case, if there is a deeper-than-expected recession, the Fed may pivot more quickly, and some analysts expect the Fed to start cutting rates this year.
Bond yields in Singapore and the US have been declining since hitting highs, and bond funds offer an opportunity to lock in higher yields and reduce reinvestment risk.
Bank deposits are looking less attractive as a result of banking turmoil, and cash is losing its appeal. Singapore money market funds have seen increased demand as they still offer competitive yields while being more liquid than fixed deposits.
Investment-grade (IG) bond funds offer compelling risk-reward opportunities for investors by providing yield levels that would only have been possible previously by investing in riskier bonds. Very short-duration funds are also seeing high investor demand due to the inverted yield curve.