2025 Fixed Income Market Outlook: The Fed, Trump and MAS on Singapore Interest Rates

20 Feb 2025
Chu Toh Chieh - Head of Fixed Income & Multi-Asset Solutions
We examine the recent central bank policies and the impact of Donald Trump’s policies from the SGD-based investors’ perspective.

The Fed

The recent strength in the US economy has given the Fed reasons to be on pause, with the FOMC (Federal Open Market Committee) not in a hurry to continue their rate cut cycle which started in September 2024. After a rate cut of 100 basis points, the Fed now prefers to choose a wait-and-see approach to observe further progress on inflation. Fed’s preferred measure of inflation, Core PCE (Personal Consumption Expenditures) was 2.8% in December 2024. While this seems to be almost at the Fed’s 2% target, the last 80 basis points of improvement has been challenging with Core PCE hovering at these levels for the last 9 months (Figure 1). The recent strength in the US labour market provides further evidence that the current level of interest rates is no longer restraining the economy as much as they had been a year ago. The pause also gives time for the Fed to evaluate President Trump’s policies on immigration, tariffs, taxes and deregulation and how they may impact the economy.

Figure 1: Fed’s Core Inflation Indicators - US inflation data still elevated but on track to the Fed’s 2% target
Source: Bloomberg, February 2025

Impact of Trump's Policies on Interest Rates

Before the election, bond markets were already concerned about Trump’s potential victory. The US 10-year yield started rising in September 2024 as the chances of Trump becoming US President started to increase (Figure 2). Singapore interest rates followed in tandem, albeit on a smaller magnitude. Markets were concerned about his pro-business and inflationary policies with regards to immigration, taxes, tariffs and deregulation.

Figure 2: Impact of Trump’s Tariff - Inflation vs Growth (US and SG 10-year government bond yield)
Source: Bloomberg, February 2025

Since assuming office, President Donald Trump wasted no time in following up with his election promises to put in place his policies. To date, he has threatened 25% tariffs on Mexico and Canada (delayed by a month) and a 10% tariff on China. Most recently, he pledged to impose reciprocal tariffs on US trading partners. These actions have introduced volatility in the bond market, causing short-end of the yield curve to rise due to inflation concerns, while long-end of the yield curve to drop due to growth fears.

Figure 3: Impact of Trump’s Tariff - Inflation vs Growth
(comparison of US yield curve prior to Trump’s announcement on tariff on Mexico and Canada and 1 week after)
Source: Bloomberg, February 2025

Market Reaction to Trump and the Fed

While the market is concerned about the inflationary impact of Trump’s policies, it is important to note that he is aware of the negative impact of inflation on ordinary Americans. Indeed, Scott Bessent, Trump’s newly appointed Treasury Secretary has made it known in several recent interviews that the Trump administration will be keen to bring down inflation. Trump’s use of tariffs may also be less aggressive than feared, as it could be a negotiation tactic with trade partners.

Nevertheless, the bond market has reacted to both the Fed’s pause and Trump’s policies, with Fed Fund Futures market pricing in slightly more than 1 cut for 2025 and another cut for 2026. This is a sharp reduction from September 2024 where market was pricing in a total of 6 cuts for 2025 and 2026. Reflecting this, the 5-year US Treasury rate has risen 90 basis points from 3.4% in September 2024 to 4.3% in February 2025.

MAS Policy

In January 2025, the MAS eased monetary policy by slightly reducing the slope of the S$NEER policy band. The combination of moderating inflation (core inflation expected to be below 2%) and slower growth momentum enabled the central bank to pursue such a policy. The MAS is also assessing the implications of Trump’s policies on Singapore’s economy.

This easing in monetary policy has led to a narrowing of the interest rate differential between US dollar and Singapore dollar, reducing the cost of hedging US dollar assets to Singapore dollar. As seen from Figure 4, the cost of hedging had started to decrease in October 2024 as the market had started to anticipate such a move from the MAS. The cost of hedging has decreased from around 1.8% to as low as 1.4% in January 2025. The lower cost of hedging implies that US dollar assetshedged to Singapore dollar would look more attractive.

Figure 4: Yield of 3yr BBB Corp hedged to SGD
Source: Bloomberg, February 2025

Investment Implications

The Fed’s wait-and-see approach on rate cuts, combined with the market’s concern over Trump’s inflationary polices, have led to interest rates retracing higher from about 6 months ago. We believe the shorter part of the yield curve looks attractive.

In addition, US dollar bonds hedged to Singapore dollar now looking less expensive from 6 months ago as a result of higher US rates and cheaper hedging cost.

Therefore, we believe a portfolio of Singapore dollar and US dollar investment-grade equivalent rated bonds in the 3 to 5 year duration range could potentially offer a yield of 3.7%, making it an interesting investment proposition for Singapore based investors.

All data are sourced from Lion Global Investors and Bloomberg as at 14 February 2025 unless otherwise stated.
Download Report

Share this article

Latest Insights

Disclaimer

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.  It is for information only, and is not a recommendation, offer or solicitation for the purchase or sale of any capital markets products or investments and does not have regard to your specific investment objectives, financial situation, tax position or needs.  Investments in the products mentioned herein are not obligations of, deposits in, guaranteed or insured by LGI or any of its affiliates and are subject to investment risks including the possible loss of the principal amount invested. You may wish to seek advice from a financial adviser before making a commitment to undertake any investment. In the event that you choose not to seek advice from a financial adviser, you should consider carefully whether the investment is suitable for you.

The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. Any opinions, projections or forward-looking statements expressed herein or information presented (which includes estimates, graphs, charts, formulae or devices) is subject to change or correction at any time without notice and is not to be relied on as advice. You are advised to conduct your own independent assessment and investigation of the relevance, accuracy, adequacy and reliability of any information contained herein and seek professional advice on them. No warranty is given and no liability is accepted for any loss arising directly or indirectly as a result of you acting on such information.

References to specific corporations/companies and/or their trademarks are not intended as recommendations to purchase or sell investments in such corporations/companies nor do they directly or indirectly express or imply any sponsorship, affiliation, certification, association, approval, connection or endorsement between any of these corporations/companies and LGI or the products and services of LGI.  It should not be assumed that investment in the securities mentioned was or will be profitable.

This publication is not intended for use by any person other than the intended recipient and may not be reproduced, distributed or published without prior written consent of LGI. This publication may not be distributed in any jurisdiction or to any person where such distribution is prohibited (including Canada, Japan, the United States of America) or to US persons (as such term is defined in Regulation S under the US Securities Act of 1933).

©Lion Global Investors® Limited (UEN/ Registration No. 198601745D) is a Singapore incorporated company, and is not related to any asset or fund management entity that is domiciled in Europe or the United States.