As yields on T-bills and savings bonds fall, what low-risk alternatives should investors consider?

SINGAPORE: When the US Federal Reserve meets this week and again in December, the market overwhelmingly expects the central bank to cut interest rates.
That likely means yields on low-risk investments such as Treasury bills (T-bills) and Singapore Savings Bonds will become even less attractive.
These debt securities are low risk because they are backed by the Singapore government, but investors looking for higher returns can consider several other alternatives.
In Singapore, the returns on T-bills and Singapore Savings Bonds have been on a downward trend since late 2022.
In December 2022, the six-month T-bill rate peaked at 4.4 per cent. At the latest auction on Oct 24, the rate stood at 2.99 per cent.
For the 12-month T-bill, it rose to as high as 3.87 per cent in January 2023. The latest rate was 2.71 per cent.
The Singapore Savings Bonds for November have a 10-year average return of 2.56 per cent. As recently as July, the 10-year average return was 3.3 per cent.
With these lacklustre interest rates, are banks turning aggressive on fixed deposits?
Mr Glenn Thum, a senior research analyst at Phillip Securities Research, said Maybank seems to have the highest returns for fixed deposits among banks here – at 3.25 per cent a year for a six-month tenure. The minimum deposit is S$20,000 (US$15,000).
DBS has a 12-month fixed deposit with an interest rate of 3.2 per cent a year. This rate is for amounts between S$1,000 and S$19,999.
Mr Thum also pointed to products offered by digital banks and financial institutions such as Stashaway, GXS, Singlife and Syfe, where interest rates are close to 3 per cent.
“The biggest positive is that these are all extremely low risk investments,” he said, adding that the minimum amount is as low as S$100 for some products.
Mr Ray Zheng, a client adviser at Providend, said that the returns on products offered by financial institutions may be attractive, but investors should find out where their money is actually going – be it fixed deposits or various funds.
CEO of SingCapital Alfred Chia added that some companies may offer higher returns as a marketing tactic. Investors need to be aware of what the actual returns will be over the long term.
For investors looking for products without lock-in periods, fixed income funds and money market funds are two possible alternatives, according to Mr Zheng of Providend.
The former is a basket of investment-grade bonds and the latter is a basket of short-term fixed deposits managed by a fund manager.
Both are highly liquid, so investors can usually withdraw their funds whenever needed.
Investment grade bonds have a minimum rating of BBB, which indicates that the bond issuer is in a good financial position to pay interest to investors.
“Bonds and fixed income are generally considered to be low-risk instruments,” said Mr Zheng, noting that they are less volatile than other asset classes like stocks.
“When markets are down, bonds or fixed income drop less than equities,” he said.
Both fixed income funds and money market funds typically have lower minimum investment amounts compared with direct bonds or fixed deposits.
However, Mr Zheng noted that these funds may be less transparent and more difficult to understand compared with buying a bond or putting money into fixed deposits.
Mr Alfred Chia, CEO of SingCapital, said there is potential for capital gains when investors buy a fixed income fund.
When interest rates fall, bond prices typically rise. An investor could gain by selling the bond at a higher price.
He also said investors should consider stocks in building a balanced, long-term portfolio.
“Let’s say for low-risk investors, they can consider an investment portfolio made up of 80 per cent bonds and 20 per cent equity,” he said.
When interest rates fall, the borrowing cost for businesses is lowered. “Businesses that can manage well, they will be able to increase their profit, so ultimately, equity markets will do well.”
The experts also said T-bills and Singapore Savings Bonds still have a place in investors’ portfolios despite the lower rates. 
Being backed by the Singapore government, they are considered one of the safest financial instruments available, Mr Zheng said.
“Investors looking for certainty in the short term (less than a year) can therefore still have a safe option to park their money in T-bills,” he said.
Singapore Savings Bonds, which have a longer period before maturity, give investors an opportunity to lock in current rates for the next 10 years, he added.
Mr Thum echoed that sentiment. 
“Investors who are looking to lock down their funds for longer durations might still find (Singapore Savings Bonds) attractive,” he said.
Mr Chia said the rate remains competitive even though the days of 4 per cent returns are gone. “We also just have to adjust according to the environment.”
That said, he has warned clients of the reinvestment risk for T-bills. That refers to the difficulty in finding an alternative that offers similar returns six months later, when the maturity is reached.
“(For) investments, you have to look at it in a longer horizon,” he said.