The hidden risk in bank savings shows up

In 2022, UOB One account offered a 3.85% interest rate.

In December 2025, UOB One account will offer a 1.00% interest rate.

In my podcast with the Straits Times, I told you bank accounts were extremely risky.

Not in a volatile sense, of course. Bank deposits are anti-volatile – they’re always worth the same amount.

But this is the risk in putting money into bank savings for the long term. 

Welcome to re-investment risk.

Re-investment risk

Reinvestment risk is the potential for your rate of return to drop in the future. This lowers the rate at which you can re-invest future cash flows from your investments. 

High yield savings accounts and short-term bonds are most prone to this risk due to their short time horizons. It means that when the bonds mature, you have to roll your money into a new bond, and you won’t know what the interest rate will be in the future.

In 2022, the 6-month t-bill rate peaked at a staggering 4.40%.

Right now, we are witnessing a drastic drop in the interest rate on Singaporean dollars.

As of this writing, the 6-month t-bill rate stands at 1.41%. 

In short, don’t put your money in short-term bonds unless you need it…in the short-term.

“What if I only use T-bills when interest rates are high?”

This is a common strategy that has great intuitive appeal. We’ll invest in T-bills when returns are great, and seek out better opportunities when T-bill rates drop!

It is also a fool’s errand.

This is market timing, and that doesn’t work out well.

Stocks and bonds are forward looking – they price in future expected interest rates. If interest rates drop (as in 2025), stock and bond prices will increase as future expected returns rise. By the time you switch to stocks and bonds, the price gain has already come and gone.

Expected returns on stocks and bonds are also on top of the risk-free rate, which – you guessed it – comes from interest rates. So when interest rates are high, the market is pricing in higher expected future returns, because the market demands higher returns versus the risk-free rate as compensation for taking on business risk. 

By the time you act on the change in observed interest rates, the market has already priced it in.

Conclusion

High-yield savings accounts and short-term bonds are great for short-term liabilities, like housing payments, car down-payments, and any other expenses that come due within the next 3 years.

But for anything longer than that, you should be looking towards more volatile, longer-term investments. If not, you’re taking on a heap of re-investment risk. And that is a price you will pay, whether you are aware of it or not.

Check out my guide on investing to see what other options are more suitable.