When comparing savings products, be it insurance savings plans or cash management products, the number one thing people look out for is the per annum return.
Right now, the highest guaranteed return for the first year is offered by Dash EasyEarn and GIGANTIQ (1.8% p.a.). Cash management accounts like Syfe Cash+ or Endowus Cash Smart don’t provide guaranteed return figures. Instead, their projected return can change anytime based on the performance of their underlying bond funds and the overall interest rate environment.
In recent days, there has been talk about the rapid rise in US 10-year Treasury yields. It is now at 1.15%, the highest it’s been since last March. In absolute terms, the yield is still very low. But the fact that the US 10-year Treasury yield has shot up so quickly has led to speculations that interest rates will start rising across the board.
When interest rates rise, bond prices tend to fall. Could this eventually affect the performance of cash management accounts like Syfe Cash+ or Endowus Cash Smart, which are mostly made up of bond funds?
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Why bond prices fall when yields go up
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Let’s say you purchase a bond for $1,000 that matures in 3 years and pays an interest rate of 3%. Each year, you’ll receive an annual interest of $30. At maturity, you will then get your $1,000 principal back.
When interest rates rise, new bonds that are issued will come with a higher interest rate. The previous bond with a lower interest rate naturally becomes less attractive. No investor will buy the previous bond at the original price of $1,000 and the bond price comes down in order to incentivise investors.
The opposite applies when interest rates fall. New bonds issued will carry lower interest rates. Investors are now willing to pay a premium for the previous bond with a higher interest rate, and so the bond price rises.
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Will rising interest rates affect cash management products?
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That brings us to our next question – if interest rates were to spike significantly, will cash management products be affected if bond prices fall?
The simple answer is not really. Although bond prices are inversely correlated to interest rates, it doesn’t necessarily mean that bond returns are inversely correlated to interest rates.
Additionally, most of the cash management products out there – Stashaway, Endowus, Syfe – hold bonds with short maturities. This in itself is a hedge against rising interest rates.
Hypothetically speaking, if you own a 10-year bond that pays 4% interest now, would you still want to own that bond when you can get another 10-year bond that pays 8% interest? This is why bonds with longer maturities have greater interest rate risk. There’s simply too much time for interest rates to change significantly.
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A case study with Syfe Cash+
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We can also take a look at Syfe Cash+ as a case study. I’ve extracted the following information from their website regarding the 3 LionGlobal funds within Syfe Cash+.
- The Money Market Fund (30% allocation) matures every 3 months
- The Enhanced Liquidity Fund (35% allocation) matures every 9 months
- The Short Duration Bond Fund (35% allocation) matures every 2 years
Overall, the mixing of these different maturities gives the Syfe Cash+ product a weighted duration of 1.12 years.
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What does this mean for you?
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If interest rates spike, that’s actually good news since about 65% of your Syfe Cash+ bond holdings will mature in the next 3 to 9 months. Upon maturity, your cash will be reinvested into higher-yielding bonds. It is likely that the projected return of Syfe Cash+ would then be adjusted higher than 1.75% p.a.
Of course, if interest rates fall, then these bonds will be rotated into lower yielding bonds at maturity. We saw this with Stashaway Simple last year. It was launched in November 2019 with a 1.9% p.a projected return. But interest rates back then kept sliding, and in August 2020 they adjusted the return to 1.4% p.a.
Incidentally, Stashaway Simple uses the same Money Market Fund (50% allocation) and Enhanced Liquidity Fund (50% allocation) as Syfe Cash+. It was likely that upon maturity, they were replaced with bonds carrying lower interest rates, which explains why the overall projected return had to be readjusted.
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What does the fox think?
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To be honest, we don’t think that interest rates are going to spike up significantly anytime soon. During the US Federal Reserve’s FOMC meeting last December, FOMC members saw no rise in rates through 2023.
Moreover, many countries are still grappling with the coronavirus pandemic and the impact it has had on their economies. Central banks are likely to keep interest rates low for at least the next 1 – 2 years to stimulate their economies.
Will interest rates continue to fall? Well, we’re pretty much at rock-bottom in terms of interest rate levels in Singapore. The SIBOR 12-month has held steady at 0.81% since last August. This time last year, the SIBOR 12-month was around a mouth-watering 2%!
So it seems pretty inconceivable that interest rates will continue to fall. They will remain low for sure, but we are unlikely to see a repeat of 2020 when the SIBOR 12-month plunged 1% in two months.
As such, we think that the various cash management platforms like Syfe, Endowus and Stashaway will maintain their advertised rates for now. Don’t like the uncertainty? You can also consider first year guaranteed return platforms like Dash EasyEarn and GIGANTIQ.
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Syfe Promo Code
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Heard about Syfe and want to open an account with them? Enjoy 6 months of free investing when you use our referral code SRP732ACX
You will get SGD $30,000 managed FREE for 6 months. This works out to $75 saved in fees if you invest $30,000, so don’t forget to use it if you’re signing up.
The Frugal Fox 