Rate cut talks have dominated finance news for over a month now. What a breath of fresh air. It gives us hope after alarming events in the recent global winding of Japanese yen carry trades, or frantic sell-off of equities and cryptocurrencies.
Rate cut twists and turns
In fact, since end-2022 some analysts have been speculating that Federal Reserve would lower interest rates soon. Before a Fed meeting or after every Fed speech, we read promising words in news headlines such as “hint”, “signal”, “likely” or “expected”.
Unfortunately, it was purely all talk no action. Nothing happened for a long 21 months. All bets of speculators proved to be merely wishful thinking and turned out to be unfulfilled expectations.
At last, the wait is finally over. Amid an obvious economic slowdown and worsening employment market in the US, the first rate cut looks foreseeable at the September 18 meeting.
While borrowers prepared to celebrate, US data released last week was a dream crusher: The August Consumer Price Index rises 0.2 percent. CPI goes up 2.5 percent year-on-year while Core CPI increases 0.3 percent year-on-year.
The positive numbers pose an unexpected twist in economic direction. It immediately dampen the hope of a generous rate reduction. This lowers the possibility of a big 50 basis point rate cut to settle for a smaller 25 basis point reduction.
Hiking rates 11 times in 16 months
In the real estate industry, vested industry players are fast to predict that rate cut will reverse the soft property market aggravated by high borrowing costs. Property agents advise potential buyers to buy now in anticipation of an upcoming boom after rate reduction.
Have people forgotten why the central banks raised rates in the first place?
After the outbreak of Covid-19, governments all over the world resorted to unrestricted money printing to give away relief packages. This saved their flagging economy and prevented their country from falling into recession. That is why we all ended up with high inflation. To cool the incontrollable rising prices, Fed had to raise interest rates 11 times in 16 months between March 2022 and July 2023.
Rate hikes were fast and furious. Federal fund rate jumped from between 0.25 percent and 0.5 percent to between 5.25 percent and 5.5 percent. This was a replay of what we experienced in the mid-2000s before the outbreak of the Global Financial Crisis.
“The hikes in mortgage rates can be fast and frequent. In mid-2005, I was still paying an interest rate of 1.3 percent for my rental properties. After three to four rounds of interest rate revisions, it had already gone up to 4 percent by the end of 2006.”
Fast winding but slow unwinding
Fed’s target was to bring inflation down to 2 percent. The market has yet to reach there. But the economy was already showing signs of weakness. Fed was under great pressure to take early action to avoid a hard landing of the economy.
However, low interest rates encourage people to spend more and save less. Cutting rates will stimulate economic activities and cause inflation to go up again.
To tame the inflation monster, the central bank needs to be careful not to lower rates too fast and too much. Unlike raising rates, we can’t expect US to cut rates 11 times in 16 months. In other words, the winding mechanism was fast. But it would take much longer to unwind.
Fitch recently predicts Fed to spread 250 basis points in 10 reductions over 25 months. It forecasts 25-basis-point cut each at the September and December Fed meeting, before it slashes rates by 125 basis points in 2025 and 75 basis points in 2026.
Simply put, we wouldn’t see low interest rates until the end of 2026.
Nonetheless, Fitch is only making a wild guess. It is possible that, for an unpredictable long time, we won’t see low interest rates again like what we enjoyed in the last decade. Like it or not, individual and corporate borrowers will be at the mercy of their country’s interest rate policy.
Above all, whether US keeps high or low interest rates depends on what happens after the US election this November. And whether the problem of the country is high inflation or recession in 2025 and 2026. Besides, Trump is against the idea of rate cut. What’s more, if he wins the election, his high-tariff China policy will inevitably result in high inflation that can revive rate hike again.
Where to park money during rate cut
In preparation for rate cut, the question is how to optimize (not maximize) the return of our money in a relatively safe way.
I have no intention to promote any investment or money-making opportunities. Nor am I in any position to give financial advice. Nonetheless, I am declaring the assets I have a position to show you where I might be biased.
1. Treasury bills
If you have been buying US treasury bills for the past one to two years, you were enjoying over 5 percent yield without lifting a finger. In Singapore, the yield for my collection of 6-month treasury bills ranges from 3.64 to 4.4 percent. Not too bad considering I only spent a minute of my time every other week on applications online.
Don’t blame me for being complacent. In the 2nd quarter alone, Warren Buffett also cashed out billions of equities to increase 81 percent holdings of US treasury bills. Berkshire Hathaway is now holding US$234 billion of these government short-term debts, even more than the amount Fed owns.
With the promise of risk-free high yield, the thriving US money market funds attracted US$106 billion cash in August alone. The total is now a whopping US$6.24 trillion. Even if rate cut is going to drive down the yield of government debts, they will still be a popular platform for liquidity investors to park their money in the near future.
For one, it takes time for treasury bills to reach maturity before lower yields kick in. Historically, after the start of rate cut, it took months for the yield curve to turn positive. It will take quite some time for the yield of short-term debts to fall behind long-term debts.
2. Fixed deposits and saving accounts
In the past two years, it was a no-brainer to park our money in high-interest saving accounts and fixed deposits.
Sadly, before we see any real rate cut by Fed, the Singapore banks are already lowering saving and fixed deposit rates. The same is true for the cut-off yield of Singapore treasury bills.
When interest rates have fallen to below 3 percent, gone are the thrills of looking for the best offer from banks at the beginning of every month. The amazing above 4 percent interest rate for a 12-month fixed deposit is still fresh in our mind. It is not long ago that banks were competing fiercely for our cash with over 7 percent interest rates for a high-interest saving account.
We still remember vividly, in the last quarter of 2022, how people formed long queues in front of bank branches instead of crowding condo new launch sales galleries over the weekends.
Blame it on the recency effect. We remember things that came last than those that came first. We completely forgot the fact that, in mid-2021, even the highest 24-month fixed deposit interest rate was only 0.75 percent. And now we complain about losing big by leaving our money with the bank for 3 percent interest rate.
Likewise, recency effect exists in mortgage rates too. Banks entice home loan applicants with 2.5 percent interest rate for the first year but higher rates for subsequent years. They bet that we all forgot we used to pay close to zero interest rates in 2021.
3. Properties
For those who still have outstanding mortgage from the banks, give yourself a pat on the back for contributing to our banks’ record profits every quarter.
Think people will start buying properties when rate cut begins? Let’s dream that tomorrow interest rates will fall back to 2021 level.
On the other hand, thanks to the increments in property tax, property annual value and GST. IRAS brought in record $80.3 billion in the last financial year. This was $11.7 billion or 17 percent more than the previous financial year. By coincidence, the collection of stamp duty and property tax together was also $11.7 billion.
For property tax alone, $5.9 billion was collected which accounted for an increase of $800 million or 16.5 percent from last year. Meanwhile, the raise to 9 percent GST helped IRAS to clock up $14.1 billion, or $2.5 billion and 18.1 percent more in revenue.
If you think you made enough contributions to IRAS in corporate/personal income tax, GST and COE, you may want to give new property purchase a miss. Otherwise, you will see the PAP (pay and pay) momentum continue in higher stamp duty, ABSD, property tax and GST in related expenses.
Nonetheless, if you don’t own any property and can afford to settle the full property price in cash, do check out the prime districts, especially seized assets in the money laundering case.
Besides, developers only sold 208 new units last month and 2,622 units for the first 8 months. This is far from the 6,421 total new units sold last year. 2024 new sales will be a fraction of the 13,027 new units sold in 2021 before rate hikes. Developers really need help now.
4. Stocks and bonds
In the 2nd quarter, Warren Buffett sold off a significant quantity of stocks, especially the shares of Apple and Bank of America. Berkshire Hathaway now has a cash reserve of record US$277 billion.
If you also believe that there is limited upside on stocks, it is fine to copy Buffett to cash out from equities and leave your cash in money market funds for the time being. Then wait patiently for bargains to appear in equities and other asset classes. After all, it is a good strategy to hold safe haven assets and maintain strong liquidity during uncertain times.
Personally, I am keeping the few high-dividend blue chip foreign stocks acquired during their last market bottom. Thanks to the Rule of 72. They are likely to double in value in around 9 years’ time. I will leave them alone for the dividends to serve as pocket money in my golden years. With longer life expectancy, these 小确幸 (little joys) can comfort a lonely heart.
On a separate note, studies of the past interest rate cycles show that global bonds tend to perform better than stocks during the periods of rate cut. Below are some analyses extracted from a recent Business Times article for your reference.
5. Gold
Gold is one of the best performing assets in 2024. Prices have gone up over 26 percent so far this year. As I am writing this post, gold price just reached another fresh all-time high. Before Fed’s first rate cut announcement, the yellow metal is testing a new height of US$2,600/oz. Rate cut is bad news for the US dollar. This benefits the zero-interest bearing bullion.
In 2022, 2023 and the first half of 2024, heavy buying by central banks contributed to the rise in demand for gold. Governments stock up their bullion reserves to mitigate risk during a financial crisis. Traditionally, gold is used to hedge against inflation and currency devaluation. It is also considered a safe haven in times of wars or conflicts between countries.
Over a decade ago, under the influence of female hormones, anxiety and insecurity drove me into buying the yellow metal. The asset generates no yield or interest. Furthermore, gold has done nothing for many years. I often wonder what I am hedging. Then suddenly, gold prices start to climb.
From time to time, you get surprise rewards for being a conservative value investor.
As a tight budget investor, I don’t want to be pessimistic. But I must be realistic. Taleb said “a foolish gambler is not committing an act of courage, especially if he is risking other people’s funds or has a family to feed”. I can’t have selfish courage that can risk my money and impact my family’s wealth.
– “Selling properties with skin in the game”, PropertySoul.com
My book Behind The Scenes of The Property Market is available for preview and order online.
Check out my new online courses How To Buy Good Quality Properties and Buy The Right Condos.
If you need advice on property matters or residential properties in Singapore, you can check out my one-to-one consultation service.
You can watch the recording of the presentations at the 2023 Mid-Year Singapore Property Review and Outlook seminar.
The video 2023 Singapore Private Home Market is available for viewing here.
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