Singapore Treasury Bills from 1987-2022: Full Analysis

Singapore Treasury bills and bonds (T bills and bonds in short) continue to intrigue me as I studied the recent movements. Things started to get interesting around March 2022 when the US Fed started talking about hiking interest rates. The following table depicts our six month T bill movement - issue date and cut off yield, which is the yield we get when we subscribe, fortnite by fortnite (no gaming pun intended).

• 20 Jan 0.48%
• 3 Feb 0.69%
• 17 Feb 0.76%
• 3 Mar 0.78%
• 17 Mar 0.95%
• 31 Mar 1.22%
• 13 Apr 1.32%
• 27 Apr 1.56%
• 11 May 1.69%
• 26 May 1.8%
• 9 Jun 2.04%
• 23 Jun 2.36%
• 7 Jul 2.66%
• 21 Jul 2.93%
• 4 Aug 2.87%
• 18 Aug 2.98%
• 1 Sep 2.99%

As of this writing, 6 month T bill pays 2.99%pa (1.49% over six months). This is risk free. Well, as long as Singapore stands, which I think she should for the next six months. I hope some of you subscribed as previewed in this post c.1 month ago! MAS also issues 1 year T bills but only on a quarterly basis and the latest cut off yields are as follow:

• 13 Apr 2%
• 21 Jul 3.1%

Singapore has one the highest home ownership in the world and as such I believe most of us reading this should have a mortgage. Given that mortgage rate is lower 2.99% (about 1.6-2.1% today), we should all draw out maximum mortgage and put into T bills, effective making free money! To illustrate this, if you can borrow at 2% and invest in this, using the 21 Jul 1 year T bill rate of 3.1%, you make 1.1% risk free with no equity. Let's use concrete no.s, say we can borrow $1m from the bank, which is not your capital since you borrowed it, then you buy the 1 year T bill and make 3.1%. After one year, you get back $1.031m, pay the bank $1.02m and voila you just made $11,000 with no capital outlay! 

Okay, you say there is duration mismatch. The mortgage can last 10, 20, 30 years, we cannot guarantee T bills will be at 3.1% for 10, 20, 30 years. The latest issue of our 10 year Gahmen bond has a cut off yield at 2.71% (see below). So technically, it is still doable. In fact, this also works if you can borrow at any kind of facility at 1-2%pa (ie lower than the cut off yield).

Now that we know this wonderful trick, the next relevant question would naturally be - so how much did our Singapore T bills yield over time? Here's the shocking conclusion. Read on. 

The MAS publishes all the data on T bills and bonds since 1987. Anyone can download all the data via the link below. The average 6 month T bill cut off yield has been 2.07% since 1987. While it has been mostly uninteresting at below 1% over the last decade or so, no thanks to QE, it did hit 3.05% in 2015 (and now 2.99%). In Jun 2000, right after the dot-com crash, it was 4.74%!  

https://eservices.mas.gov.sg/statistics/fdanet/BondTreasuryBillsCMTBsAuctions.aspx

We spent 16 years discussing on this infosite about investing, taking risk and trying to make 8%pa. We all know someone, aunties or uncles, or even our own parents rushing to banks every few months to hunt for the highest fixed deposit rate and park money there to earn 1.x%pa. But since 1987, the Singapore government provided this ultimate instrument that can make on average 2%pa and in "good times" 3-4%pa. If you can borrow at 1+%pa which most of us could, we can make free money at infinity%pa. 

So, I am shutting down this infosite, thanks for reading folks! (Young Wonder Woman saying goodbye below)

Courtesy of Martin/Getty Images

Just kidding.

Invest in Risk Free Singapore T Bills!

Treasury bills or T bills are short term bonds issued by the government for periods of less than 1 year. For the longest time, they only yield basis points due to global quantitative easing (QE) which has drove global interest rates to zero. But in recent weeks, yield on Singapore’s T bills has shot up with the Federal Reserve raising interest rates and our T bills now yield close to 3%! 

In financial textbooks, we always talked about the risk free rate. This usually referred to the country's ten year bond yield which was usually at 3-4% in the good old days and this was the basis of all investments because risky assets cannot yield less than the risk free rate. During the great QE over the last 12-13 years, risk free rate went to zero and hence anything yielding 1-2% becomes interesting. This was especially so when disruptive companies promised to grow to the moon, increase their revenue 100x and vowed to change the world. Speculators rushed in where value investors feared to tread.  

Now that risk free rate is back to the textbook level of 3%, there is a lot more downside for such stocks with minuscule earnings trading at 50x PER (this translates to earnings yield of 2% which is lower than the risk free rate now and hence makes no sense for value investors). So, if you want to buy Tesla's stock at current 100x PER, maybe you should buy Singapore T bills instead.

The only way it is justifiable to buy Tesla based on the risk free yield vs Tesla's earnings yield comparison is that Tesla grows its earnings more than 10x from here which means that the future PER is closer to 10x (ie earnings yield of 10%). Even so, current share price has already factored in this scenario, so Tesla has to do more than that for its market cap to go to USD2trn (another 110% upside from its current USD900bn market cap). This is not to say that it cannot be done, just very difficult. Having said that, this valuation math also didn't work when Tesla was USD100bn going to USD1trn in market cap. So speculators in Tesla did make a lot of money so far!  

T bills is a good way to park any excess cash that you have because it comes back soon, in 6 to 12 months. In Singapore, you can only buy through the three banks: DBS, OCBC and UOB and no relationship manager will recommend this because they earn nothing. The process is also deliberately cumbersome to discourage buying but you just have to push on. You will be asked to choose either competitive or non-competitive bids and a huge warning would pop up to say that if you choose non-competitive, you might lose money - which could be true with negative interest rates, but not today.

The last bid closed on 21 July and the details are in the table above. If you chose the non-competitive bid, you would have gotten 100% allocation at 2.93%, which is the cut-off yield. Non-competitive bid is 40% of each issuance and unless the amount of non-competitive bid exceeds 40% which is c.SGD2bn, most likely than not, you will get 100% allocation. As for competitive bid, you will dictate the yield you want, but risk getting nothing if your bid is higher than the cut-off yield.

Note: this is 2.93% for 12 months so you only get half the money (ie 1.465%) over 6 months.

Looking at this 6 month T bill at almost 3%pa, some of you might have figured this out - the Singapore yield curve is inverted with 6 month T bill and also the two year bond at higher yields vs the 10 year Singapore bond at 2.7% as of this writing. While the academic theory is not clear, inverted yield curve usually means that a recession is coming. This means that things can get ugly, you may not have income or you need to help someone close who needs money, so you do not know when you need cash. As such, don’t put everything into this one basket. Well, recession aside, inflation is looming and money in the bank is losing value. So if we can claw back 3%, we should seize the day! The next T bill auction closes 4 Aug. See you at the ATM!

Huat Ah!

Negative Yielding Corporate Bonds

There are c.$13 trillion of negative yielding bonds globally. This accounts for 25% of all investment grade bonds. Please take a minute to digest this. Investors are willing pay $13 trillion for an investment that would not give them back their principal. This amount is a quarter of the bond market. This is the warped logic that the world of investing has come to accept.

It first started with sovereign bonds. When the ECB went into negative interest rates to boost the economy, the governments who could get away with negative bonds issued them ie Germany. Japan then followed suit. It was initially thought that the arrangement would be temporary, when the economy gets back in shape, we can stop. Well, we didn't.

The chart above from Bloomberg shows the magnitude and breakdown of negative yielding bonds. Today, corporates are issuing negative bonds as well. This is an excerpt from a reputable internet news source:

Siemens (SIEGY) borrowed €1.5 billion euros ($1.6 billion) over two and five years. Those bonds offered a zero coupon (interest rate) and were priced with negative yields, meaning investors are effectively paying to lend the company money if they hold the debt to maturity. The remaining €2 billion euros ($2.2 billion), borrowed over 10 and 15 years, offered tiny rates of interest. The two-year note, whose yield reached minus 0.315%, was "the most negative yielding corporate bond ever to be priced in the primary market," the source said.

As this went on, experts realized a few things about negative yields: it is like drugs or steroids. Once you are on it, it is very difficult to get off. It has certain positive impact but the side effects can be very bad. In finance, it was believed that negative interest rates would boost lending, force people to put money to work and hence bring the weak economies back to 2-3% growth. But instead, the side effects are manifesting.

Asset prices distortion: negative interest rates had brought down global returns. Recall the lessons in basic finance. Asset returns are based off risk free rate. This was the return on government bonds, usually the 10 year bond. It used to be 3%. After the Global Finance Crisis, it went down to 0-1%. Today it's negative! When the risk-free rate is negative, all the returns of the different asset classes are affected. Investors used to demand 8-10% returns on equity, maybe now they are happy with 5%. That is why we are seeing for 30-40x PE stocks that many are happy to buy. 

Real estate is the big beneficiary. Why has Singapore property market gone from S$1,000 psf to S$1,500 and S$2,000-S$2,500 psf? Did Singapore really more than double in attractiveness? Did the property developers suddenly make much higher quality condominiums with a smaller balcony and better interior? Did our government really make Singapore super attractive in with lots of greenery and better MRT, better healthcare in the last ten years? I think it is just global negative interest rate in action. Global property prices in global cities have been going up. Asian cities have reached 1+% rental yield. This means that it will take almost 100 years to recoup your capital if you don't sell. Singapore leasehold properties are only for 99 years.

Private equity markets gave us another interesting story. With negative yields, investors started hunting for returns everywhere. They found hundreds of unicorns - startups and disruptive technologies that promised to change the future. Alas, most aren't real. We saw how WeWork blew up. Uber and Lyft also saw the share prices plunged. Investors were willing to put a lot of money into dreams about rainbows and mythical horses because there was simply too much money around and nowhere to invest to earn good returns.

To sum it up, we are now in unchartered territories and we must proceed in prudence to find the optimal way forward. First, own at least one property because we don't want to get caught short. Property prices are not going to fall as long as negative interest rates continue to dominate the bond markets. Next: focus on equities because it would continue to grow with bonds becoming less attractive and private equity being too cowboy (re: Theranos). We also need to tweak how we use valuations. We can no longer work with 15-20x PE in the new negative yield regime. Maybe we have to buy good companies at 30x PE. The new cheap could be 20x PE. Hope this helps!

Huat Ah!

Lesson from Bohemian Rhapsody - Part 2

*This post contains spoilers about Bohemian Rhapsody - the 2018 Hollywood movie about Freddie Mercury, pls stop reading if you intend to watch the movie. 

In the last post, we talked about never ever betraying your cadre and how if you did, your most trusted friends and family will forgive you once or twice. But, there is only a few times you can do this. There are people who keep betraying and in the end, they have no one to turn to. Sometimes we hear stories about lonely old men living in temples with no one to turn to. Wonder what they did to those who care about them? Did they turn everyone away? So in short, don’t betray the trust of the people who cared about you most. 

By never betraying our cadre, we stand to risk supporting the wrong people though. Warren Buffett made this mistake a couple of times. He supported John Gutfreund who subsequently brought down Salomon Brothers and he was stuck in supporting Coca Cola even when the firm’s culture had changed to one that is all about bonuses and incentives to company’s management and employees.

Right: John Gutfreund, King of Wall Street who brought down Salomon Brothers. 

Left: Warren Buffett testifying before Congress because he trusted John.

 

Having seen how some of these episodes played out, I think probably this is unavoidable especially when the ties are very close. For example, how far would you support your sons and daughters, even if they are wrong. The answer is - almost all the way. The father or mother of an alcoholic or drug abuser can never give up support. They must hope that the child will one day change his ways short of disowning him or her. But disowning is just a psychological choice. Kinship is a biological link that cannot be broken. 

However, for friends, teammates and colleagues, we can exercise our judgement call and support high integrity people. Although, we never know and people change. Unfortunately, sometimes, good people do support the wrong partners that they cannot betray only until public opinion turns bad enough such that it becomes reasonable for betrayal. This was probably what happened with Warren Buffett and John Gutfreund. 

So, coming back to investing, it sometimes pay to learn some of these dynamics that could happen in executive management. How close is the management cadre and can they work to create value for shareholders? Is the Chairman or the Board tied into supporting a poor performing CEO and shareholders are taken for a ride together? We must be mindful of these even though it’s not easy to learn such intricate details as retail investors. 

Next, we shall discuss the 2nd lesson: identify the right advisors and listen to them.

Freddie Mercury, Queen and Mary Austin - Freddie's wife

In Bohemian Rhapsody, Freddie Mercury had a great band, his wife and his friends but he turned all of them away and listened to one adviser who turned out to be an asshole. This person blocked everyone else off and tried to dominate Freddie’s life and he didn’t realise it. This is sad and we have to be careful that this could happen in both our lives and also in companies. 

 As an investor, I had also witnessed episodes as such. The CEO of the company had a weak cadre of advisors and was listening to the wrong advice. The company made missteps after missteps until the market cap between itself and its closest competitor became miles apart. It could happen to countries too. Prime Ministers listening to the wrong advisors. Emperors in past eons losing their dynasties because of a single eunuch or concubine giving bad advice. 

So, we need to be mindful about such things while we do our due diligence on companies. It can be hard to get such information via annual report and public sources. Sometimes we can get vibes or snippets if we pay close attention. In Singapore, we can get to hear stories if we dig enough. But, by and large, we have to assume that good companies that created good financials had strong CEOs and teams behind them. Then check around and look out for signs of bad advisors. 

On the topic of cadres and teams, we also come the the 3rd lesson from the movie: four heads are better than one. 

Queen was made up of four members, Freddie Mercury, an astrophysicist, a dentist and a mechanical engineer. They were so different and so not-artistically-inclined based on their choice of academic training. Yet they came together to create some of the most memorial music of the 1970s and the 1980s. This is the power of teams. 

In one memorial scene, Freddie lamented that he failed with his new venture because there was no one to tell him his rendition of a certain piano section was crap or his lyrics were uninspiring or simply this part of his music sucked. The team and the debate was what created epic music. 

Bill Gross - The Bond King

This is exactly the same as investing. One person’s view is never enough. In the recent weeks, various financial newspapers updated us the latest sad chapter in the story of Bill Gross, the Bond King of PIMCO. Bill Gross was the legendary investor in the world of bonds or fixed income. He was so good that his name became synonymous with PIMCO, the world’s largest bond fund. For decades, Bill Gross = PIMCO = good performance in fixed income world. A few years ago, he had a fallout with his team at PIMCO and went to Janus Henderson. But without his team, performance suffered and now he was retiring from his new firm as well. The mighty Bill Gross, the Bond King, can only be as good with his team. 

To be sharper investors, we will always need someone to debate stocks. Warren Buffett debated with Charlie Munger. Yes, two men is a team. Although the best investment teams usually had 3-4 core members who constantly debated and tear down one another’s investment ideas. This is the crux of good investing. The teammates also need to trust one another. It is not about ego. It is not about not being friends enough. Tearing down a stock idea is just about the stock. It is not personal. But being humans, we often think it’s personal. It takes years and chemistry to build enough trust in a team to bring out and crystalize the best ideas. 

Four heads are better than one. 

Next post, we discuss the last lesson! Huat Ah!

Previous: Lesson from Bohemian Rhapsody - Part 1

Buying Singapore Savings Bonds

Investing is a fascinating game in a sense that no formula ever works all the time. There is no "Bao Jia" or sure wins. There are no programmable solutions, no absolutes and we must always break the rules to win. There is also no such thing as never. Warren Buffett himself broke his own rules so many times, in order to win. He said he would never buy tech stocks, yet he bought IBM and Apple.  He concluded airlines won't make their cost of capital, yet he bought airlines! 

Airlines, the one industry that was guaranteed to lose money! How to be a millionaire? First, make a billion dollars and then buy an airline! That's the infamous running joke in investment circles for decades. To ward off that taboo, Vietnam's most famous LCC (low cost carrier) airline deployed the auspicious red color and bikini girls to market itself. So far, it had a successful IPO, but we shall see!

VietJet and its bikini girls

Singapore Savings Bonds or SSB is also an idea that is somewhat against the rules in value investing practice. Value investing targets high single digit return, not 1-2% return over 10 years. So why are we discussing SSBs here? Shouldn't we talk about Colgate and Unilever and Moutai?

Ok first let's look at what's SSB all about? 

SSB was launched in 2015 with underwhelming response but had since grown to be slightly more popular. According to a recent ST report, 32,000 people had invested S$810 million in SSBs. This is 16x more popular than the conventional government bonds which require investors to hold to maturity i.e. 30 years for the longest issues. With SSB, we can sell and get back capital plus interest any time. However, the total investment so far is way below the S$4 billion target. 

As another gauge of its popularity or rather un-popularity, we have hundreds of thousands of retail investors in the stock market (triangulated from 1.6m SGX CDP accounts with some that are likely dormant), the mere 32,000 in SSBs again pales in comparison despite the product being investable at just S$500! The lowest denomination for stocks would usually be four digits.

Why the un-popularity one might ask. I guess it's really about the lack of marketing and distribution. This is a product directly launched by MAS (Monetary Authority of Singapore) which obviously had no marketing track record and the banks, even though they are distributing the product, had no incentive to sell SSB since it sucks deposits out of their balance sheet and they don't earn anything by selling more (only S$2 per transaction!). Also, the interest rates are really not palatable to investors. The table below shows how it works.

SGS interest rates

SSB works differently from a conventional government bond as you can redeem it anytime. But because it provides this optionality, the interest rate is also slightly lower. Hence depending on how long you put in, the interest rate you get is different. Reading from the table, it says that if an investor put the money in for 1 year, he stands to earn 1.02% interest. This is similar with some of the fixed deposit schemes out there but as you can see, the interest rate creeps up the longer one holds. At 4 years, we get to 1.5% and at 10 years, we get to 2.27% (look at the average return per year not the interest in the middle row). This is actually close to where the conventional 10 year bonds are trading at.

The chart below shows that 10 year Singapore Government Bonds are trading at 2.24 to 2.32% yield. So, it's really not too different from SSB yield at 10 years. The trouble with bonds is that the global low and negative interest rate environment had really caused yield to collapse. Reading from the same table below, we see that 30 year bonds are trading at only slightly higher 2.5% yield. Holding this for 30 years gets you just 2.5% per year! Singtel gives you c.4% dividend with growth potential in India, Thailand and Indonesia! 

SGS prices

Ok, so bonds are really too boring for value investors. We are talking about 1-2.5% return over decades. So why bring it up here? The argument here is that this instrument should really be competing with cash, not compounders or value stocks. This was the original intent by MAS, and if we think about it, it's really thoroughly thought through and quite beneficial to small retail investors. We all have dormant cash lying all over the place. This cash earns 0%. What we should do is to put some of our dormant cash into this (lowest denomination starts at $500!). If and when we need the cash, we can just take it out (but we do stand to lose the additional interest for the subsequent years). Everything can be done online. It's that easy.

Ok but what about fixed deposit schemes offered by the bank that are better? Well, they are usually for only 3-6 months and we have to keep rolling to enjoy the good rates. It's really a bit too much hassle for most working people and only retired aunties and uncles can afford to do that - queuing at the different banks to roll fixed deposits and get free Fitbit or porcelain sets. The irony here is that most aunties and uncles usually roll the same pot of money just to get that additional 20-30bps, but if they had put into SSB, they stand to earn up to 2.27% over time, more than 100bps incrementally. 

As astute investors, we should also deploy some capital here bcos it's better than cash. Most investors usually have some cash, say 5-15% to have the optionality to buy great stocks if and when the opportunity comes. This cash earns nothing but if it is deployed into SSB, it stands to earn at least 1%. If it so happens that the cash is subsequently needed in a few months, we still get the accrued interest. So, it's essentially cash but earning interest.

SSB details

There is one last point to make which is listed in the details above. There is actually a cap on how much SSB one can hold. It's $50k per issue and $100k across all issues. That's like not enough to pay the ABSD for some who are thinking of buying their second properties. This is likely a precaution given that our Government is super cautious. We don't want some shady billionaire putting in one billion and then earning $20m per year out of this. Another caveat is that CPF and SRS funds cannot be used, unfortunately.

So, that's in short the idea that's against the rules. Investing and portfolio management is also about relative benefit more so often than absolute benefit. This is a lesson that some may never learn because we have been thought to think in binary terms - something is either good or bad, right or wrong. A portfolio is never like that. If this is better than cash, we should buy this over cash. We judge a stock by its relative upside vs other stocks in the portfolio. Never only looking on its own merit. By always thinking in relative terms, we can then upgrade our portfolio part by part and hopefully some day achieve optimization.

That's practical investing!

Disclaimer: this author bought the SBAPR17 GX17040N SSB tranche.