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Could we see a return to living on interest income?

The Edge Singapore
The Edge Singapore2/5/2018 08:00 AM GMT+08  • 5 min read
Could we see a return to living on interest income?
SINGAPORE (Feb 5): For the first time since they were introduced in 2015, demand for Singapore Savings Bonds has exceeded supply.
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SINGAPORE (Feb 5): For the first time since they were introduced in 2015, demand for Singapore Savings Bonds has exceeded supply.

On Jan 29, the Monetary Authority of Singapore announced that more than 6,300 investors had submitted applications for $172 million worth of the bonds — versus supply of $150 million. The bonds pay an interest rate that roughly corresponds to the yields of Singapore Government Securities — currently at 2.2% for a 10-year holding period.

Could the record take-up be a sign of changing investor preferences? Last month, the yield on 10-year US Treasuries surged briefly past 2.7%. The 10Y has been trading close to that level ever since. Kit Juckes, chief foreign exchange strategist for Société Générale, says it is “going to be hard not to hit the 3% mark on the 10Y note yields at some point in the [current economic] cycle”.

At that rate, a retiree with capital of $1 million would enjoy a risk-free income of a relatively comfortable $30,000. Should the 10Y yield go past 3% and towards 4%, a level not seen since before the 2008 financial crisis, interest incomes would be even more comfortable. Some institutional investors — pension or endowment funds, for instance — might no longer chance the riskier returns promised by the stock market.

There was a time when such a life was very much the norm — at least among a certain class.

In Jane Austen’s Pride and Prejudice, the well-off Mr Darcy is pronounced as having £10,000 a year. His income could be estimated quite neatly because at the time the book was published, 1813, gilts paid interest of 4% or 5%.

These high and relatively stable interest rates enabled other Austen characters to estimate the standards of living they would be able to afford on their inheritance, and guided their life choices. So Emma, an heiress of £30,000, would have an income of £1,500 a year — enough to afford her own carriage and horses, and to be quite particular about her suitors.

Yet, it cost a lot less to live well in Victorian times. There were no storekeepers and logistics providers adding to the cost of fresh produce, and most people had just a few sets of handmade clothes that they wore over and over again. For £1,000 a year, a family could have three female servants, a coachman and footman, a four-wheeled carriage and a pair of horses.

Today, in Singapore, it would cost roughly $30,000 a year to hire three maids. A personal chauffeur would cost about $30,000 a year, based on job listings on JobStreet. And, according to personal finance blog Money­Smart, the annual cost of owning a BMW in 2014 was a little over $28,000 a year. This includes monthly loan repayments, fuel, maintenance and parking but excludes a 50% down payment for the car. That brings the total to over $88,000 a year. At an interest rate of 5%, such a lifestyle would require capital of $1.8 million.

This is also before factoring in the many other luxuries of modern life: a mortgage for a home (which Darcy would have inherited), an annual iPhone upgrade and a yearly ski trip in Niseko (undoubtedly more expensive than hunting grouse in one’s backyard). Not to forget, the modern equivalent of a Mr Darcy would almost certainly have a private jet, several holiday homes and the pressure of buying a new couture outfit every season.

What is the lesson here? The lifestyle of genteel leisure available to Mr Darcy would be available today only to someone with a very large amount of wealth to begin with. Those without an inheritance can add to their wealth by working for a salary and putting their money to work in riskier assets. With some investment knowledge, which this paper hopes to supply, and a little luck, it is possible to improve one’s lot.

Also, the landed gentry tended to disapprove of the pursuit of wealth through trade. The result was that over time, characters such as Mr Darcy tended not to get richer. Over time, inflation ate into the returns of interest income. The UK’s 1917 war bonds, which initially paid an interest rate of 5% and were later refinanced at 3.5%, were drastically devalued over the years. According to a 2007 article in The Telegraph, £100 invested at the outset (equivalent to £3,000 in 2007) was worth just £80. In 2015, the UK government fully redeemed these bonds at face value.

Today, economic growth is powering ahead in many countries and corporate earnings are improving. That should make it a grand time for entrepreneurs and stock markets. Our Cover Story this week delves into what investors should expect as interest rates rise, and the kinds of companies that should make good investments. While there is no harm in padding up one’s portfolio with some interest-bearing assets, now is probably a good time to go for growth rather than income.

See: The return of inflation?

See also: Central banks risk falling behind the curve, says CLSA’s Fishwick

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