Rising US Treasury yields are shaking up global bond markets and creating new opportunities for Singapore investors. With 10-year US Treasury yields hitting a post-pandemic high of 4.788% on January 13, the ripple effects have been felt in major sovereign debt markets worldwide, including Singapore.

A Global Surge in Yields

The surge in US Treasury yields has been fueled by rising fiscal risks, stubbornly high inflation, and slower-than-expected interest rate cuts by the Federal Reserve. This upward trajectory has impacted yields on 10-year government bonds in the UK, Japan, and Germany, with Singapore’s 10-year government bond yield also climbing above 3% this month, up from 2.8% in December 2024.

Shorter-term instruments have followed suit. The yield on Singapore’s six-month Treasury bills rose to 3.05% in the most recent auction on January 2, marking a slight uptick from December’s levels.

More Options for Singapore Investors

The next auction for six-month Treasury bills will be held on January 16, followed by the year’s first auction for one-year bills on January 23.

Eugene Leow, head of fixed income research at DBS Bank, expects six-month Treasury bill yields to hover around 3%, barring further rate cuts by the Federal Reserve. He had initially predicted yields to soften to 2.5% by mid-2025, but stronger-than-expected US economic data has kept yields elevated.

“Investors sitting on T-bills should consider broadening their fixed income allocation to include longer-term bonds,” advised Hou Wey Fook, DBS Bank’s chief investment officer. With absolute bond yields significantly higher than a decade ago, Hou views the current price points as particularly attractive.

Balancing Risk and Returns

DBS Bank recommends diversifying fixed income portfolios to include a mix of shorter-term bonds (two to three years) and longer-term ones (seven to 10 years). Daryl Ho, the bank’s senior investment strategist, highlighted that the yield curve has normalized, meaning longer-term bonds now offer a yield premium.

“You can lock in yields for a longer period with stable coupon returns, making 10-year bonds a compelling option,” Ho said.

However, caution remains for bonds with durations beyond 10 years. Aaron Chwee, head of wealth advisory at OCBC, noted that such bonds are more sensitive to inflation and interest rate fluctuations. Potential tariffs or geopolitical tensions could raise inflation risks, diminishing the appeal of long-dated bonds.

Investment-Grade Bonds: A Safer Bet

DBS Bank underscores the importance of prioritizing investment-grade bonds over high-yield, or junk, bonds. The latter, while offering higher interest rates, come with increased risk of default.

“Risk is better expressed in equities rather than high-yield bonds,” said Hou, advising investors to allocate the risky portion of their portfolios to equities.

For those seeking diversification, Hou recommended bond funds over individual bonds to mitigate concentration risks.

A Look Ahead

Singapore investors now have more choices in the bond market as rising yields offer better returns. Short-term Treasury bills provide capital protection, while longer-term bonds offer stable, higher yields for those looking to lock in returns over a decade.

As global markets remain volatile, diversification and a balanced approach will be key for investors navigating this new era of elevated bond yields.

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