Dividends, Treasury Notes and Me

I like to extend a warm welcome to the five new subscribers who joined us since the last blog post. Your support is a major motivator to me to keep this going.

I am sure most of you would have heard of, read about or tracked the recent steep rise in the yields of 10 years US Treasury Notes. This is especially so if you are an income investor and if you have not, i sure like to convince you to do in this post.

They are basically the bonds issued by the US government and the yields are “interests” paid by them to the bondholders. The 10 years Treasury Note is of the most significance among all the Treasury notes and is the most widely tracked by the market. It not only determines the mortgages rate in US but also provides a signal of investor confidence to the market. It is said that the higher its yield, the higher the confidence level.

The yield of the 10 years Treasury Note hit 3.128% briefly last night and closed at 3.06%, its highest level since July 2011. The yield has been climbing for the last few months and its steep ascent has contributed partly to the volatility we saw in the stock markets lately. It is difficult to imagine that it was 1.843% a year ago and 2.477% at end 2017.

Given the connectivity of financial markets globally, our local Singapore Interbank Offered Rate (SIBOR) is also influenced by this increase. The impact so far has been more muted compared to US but there is no guarantee that this will remain the case going forward. Our 3 months SIBOR rate was 1.0% a year ago, 1.2% at end 2017 and it is now 1.5%. Like many Singaporeans, my property loan is not immune.

All investors should take note of the 10 years Treasury Note, but for income investor, this becomes an important investment product to take particular notice of. In most cases, bonds issued by government are considered safe investment. In US, the Treasury note is considered a “risk-free” investment – you can be certain that you will get paid the interests when they are due and the principal when the bond matures. In between, if you can afford to leave the money in and hold till maturity, then the fluctuation in the bond prices doesn’t matter to you.

The 3% risk-free yield is not bad – considering that our CPF OA is 2.5% and SA is only 4.0%. The issue with the latter is that your money will be locked in till your retirement (and beyond) while Treasury Note is liquid. The Singapore Saving Bond (SSB) provides some flexibility but there is a cap of $100,000 capital. SSB’s 10 years return has only recently increased to 2.4%. Like all things, there is a catch, and for us in Singapore, it is the foreign exchange exposure – US$/SGD and the 30% withholding tax that US imposed on dividend distributed to Singapore citizens, i.e. your dividend will be taxed at 30% and you only get 70% of the dividend declared.

Many of you who are regulars on this blog will know that I am looking to build a 5% yield portfolio. So, at 3% yield and given the additional exposures, the US Treasury Note is not extremely appealing but its yield is expected to continue to climb given that the Fed is determined to raise interest rate to combat inflation in US. So I will be watching it.

As an income investor, its appeal goes beyond just the absolute yield. As it creeps closer and closer to 5%, I will probably venture into it, maybe just above 4% to counter the riskier stocks. Yes, it’s a good means to achieve diversification – FX exposures/opportunities and its Risk-free.

If its rate continues to climb, I will seriously consider my current stocks that return 3% dividend and below. I may swap them for the US Treasury Note or SG govt bonds.

How to buy? You may ask ….

If you don’t want FX exposures and paying withholding tax, how about Singapore government bonds? Check it out here: http://www.sgs.gov.sg/Individual-Investors/Bonds-and-Treasury-Bills/FAQs.aspx#13._What_is_theand SSB is always an option if you have not reached the cap: http://www.sgs.gov.sg/savingsbonds/Your-SSB/How-to-buy.aspx

In case you are wondering, our Singapore government 10 years bond is yielding 2.67% as of last Friday. Hmm … maybe I should invest in it with my CPF which is yielding 2.5% only.

Before I go, I like to share this additional thought:

As the risk free yield increases, then the returns/dividends of the riskier stocks must increase for the same “risk premium”. If they cannot distribute more dividends, then their share prices will have to come down. So, I expect more volatility in the stock markets in the coming months with higher yield from Treasury Notes as investors adjust their portfolio and expectations of returns.

Let’s strapped in and be mentally prepared. If we find that the volatility in the market difficult to stomach, then maybe we should reconsider our investment choices and go for safer investment products, lower volatility and accept lower yields.

Wishing you a great weekend folks.

Will blog again soon.

Regards,

Warriortan

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8 thoughts on “Dividends, Treasury Notes and Me

  1. In a rising interest rate environment, the caution would be twofold:
    1) The value of the bond has an inverse correlation to the direction of the rates. Only if held to maturity is the full value ‘guaranteed’.
    2) If the rising rate is a result of rising deficits (as opposed to inflation) an argument could be offered that the USD could weaken mitigating some of the perceived benefits. Since little occurs in a vacuum, the real answer resides in the reaction of the home currency (SGD in your case) to the value of the USD at some point in the future.

    Liked by 1 person

    1. Agreed, bond price will drop hence if I buy a bond, I must be ready to hold till maturity. Can you explain the part around rising rate as a result of rising deficits for my learning?

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      1. Sure. The US tax cuts have resulted in greater deficits resulting in an increased supply of treasuries hitting the market (which is projected to continue for awhile). The theory behind the tax cuts was to stimulate growth – essentially GDP growth would exceed the revenue loss. That was questionable when the cuts were enacted, but subsequent actions (notably trade & tariffs) tend to be at odds with the stated objective. Therefore, my belief is the end result will be higher government deficits resulting in higher interest rates – before any inflation or currency exchange impact is considered. I could be wrong – but the US economy would have to grow at a sustained 4% + rate to succeed in that endeavor. Conceivably, we could see even higher rates in a couple of years if I’m right.

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    1. Indeed, if you believe US$ is going to strengthen against SGD, you get double gain. The only sticking point is the 30% WHT that makes this less appealing. But there are a few bonds ETF here that may be useful to monitor. Have you bought any SGR lately?

      Liked by 1 person

      1. Not yet! I am currently at ~10% paper loss, 5% including dividends. I am holding on to more cash now. There are a few other counters on my watchlist that might present more opportunity than SGR now. So I am waiting.~

        Liked by 1 person

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