I would prefer 1. if it had full type safety. I’m imagining some sort of a build process that looks for any .sql files in the project and spits out .sql.d.ts in the same directory with the input and output types according to the current schema of the database. Another nice thing about a setup like this imo would be that the .sql files would have the full support of the editor for completions and execution, unlike sql fragments in a Typescript file.
For Postgres there is https://github.com/adelsz/pgtyped, sounds pretty much like what you describe?