12 month T-Bills at 4% yield – NOT a good buy with CPF-OA? Compared vs 6 month T-Bills, Fixed Deposit or Singapore Savings Bonds?

 

Okay my apologies.

I’ve been getting a flood of questions on whether it’s better to buy the 12 month or 6 month T-Bills using CPF-OA.

I was quite tied up and only got around to crunching the numbers this week.

The result though, surprised me greatly.

Because it turns out the 12 month T-Bills may not be better than the 6 month T-Bills for CPF-OA.

In fact – there are quite a few situations where the 6 month T-Bills outperforms the 12 month T-Bills for CPF-OA.

Quite a lot to cover, so lets go.

Why 12 month T-Bills may not be better than 6 months T-Bills for CPF-OA?

2 big reasons:

1. You will lose 14 months of CPF-OA interest
2. Yield on the 12 month T-Bills may not be good

You will lose 14 months of CPF-OA interest

The main problem here, is because of the maturity date of the 12 month T-Bills.

30 January 2024, which is incredibly close to the end of the month:

         

You see the problem with CPF is that you will lose CPF-OA interest for the whole month – regardless of when you withdraw or deposit from CPF-OA.

If you withdraw on 30 Jan, you lose the whole month of Jan interest.

If you deposit on 1 Feb, you still lose the whole month of Feb interest.

This is a big problem for the 12 month T-Bills issued on 31 January 2023.

Because you see – you need to withdraw from CPF-OA on 31 January 2023 to buy T-Bills.

So you lose the whole month of January 2023 CPF-OA interest.

And the T-Bills mature on 30 January 2024, so you lose the whole month of January 2024 CPF-OA interest.

Upon Maturity, the T-Bills money goes into CPF-IA first…

But, and here is where it gets a bit tricky, when the T-Bills mature they will go into your CPF-IA account first.

So let’s say all goes smoothly and the T-Bills money is credited into your CPF-IA on 30 January 2024.

You then need to transfer it from CPF-IA back into CPF-OA.

Which will take 3 working days (if you do it by ATM), and 7 working days (if you do it through the bank).

You see where I’m going with this.

So by the time the money goes back into your CPF-OA, you’ll be in February 2024.

Which means you also lose the February 2024 CPF-OA interest.

This means that for the 31 January 2023 T-Bills, you are likely to lose 2 whole months of CPF-OA interest if you buy using CPF-OA.

But… what if you roll over into T-Bills in February 2024?

There is a notable exception to this though.

Because the T-Bills money will be refunded into CPF-IA.

If you use the CPF-IA money to reinvest in February 2024, then technically you won’t “lose” the extra month of CPF-OA interest.

I suppose you could argue you’ll just roll over into T-Bills in February 2024.

But here you’re making 2 big assumptions.

First – that T-Bills yields will remain high in February 2024, a whole 12 months from now.

And secondly – that CPF-OA interest rates will not be increased by February 2024.

This is not a simple assumption.

This requires interest rates to stay up for a whole year – with no adjustments to CPF-OA.

Tricky…

Yield on the 12 month T-Bills may not be good

The other big problem – is that you don’t know what the yield on the 12-month T-Bills is going to be.

If you’ve walked past a physical bank branch this week you’ve probably seen long queues.

Those queues are not for people trying to get new notes, they are for people trying to buy 12 month T-Bills with CPF-OA.

Crazy stuff.

Now if you’re going to spend an hour in the queue just to buy T-Bills with CPF-OA.

You’re going to want to make sure you get an allocation no matter what.

Which means you might submit a low bid, say 3.0%, just to ensure that you get allocated (instead of wasting an hour of your life).

If enough people do this, the yield on the 12 month T-Bills starts getting wonky.

Especially when there are only 4 12 month T-Bills in 2023…

What is the estimated interest rate on the 12 month T-Bills?

Latest SGS yields are at 4.1%.

The problem is that the global interest rate trend has been firmly down the past few weeks.

And all the recent T-Bills auctions have seen cut-off yield come in below market yields.

Coupled with the (anecdotally) insane demand for the 12 month T-Bills from CPF-OA applications, I think you’ll probably see yields come in below 4.1%.

Historical 12 month T-Bills auction data

For reference, here’s the historical data for the 12 month T-Bills going back to mid 2022.

The most recent 12 month T-Bill was on 13 October.

Market yield back then was about 3.57%, and cut-off yield came in firmly above that at 3.72%.

That said, this was back in October when interest rates were on a clear uptrend and the Feds were hiking 75bps per hike.

I’m not so sure you see the same this time around.

Looking at market pricing, you can see yields start to come down a bit the past month or two:

My estimate for the next 12 month T-Bills yield – 3.9% – 4.1%

The 12 month T-Bills in my view are a lot harder to call than the 6 month T-Bills.

Firstly because they are so rare, and secondly because I suspect there will be higher retail demand which could skew the numbers.

Gun to my head, I would say maybe 3.9% – 4.1%.

But I do think there is a risk it comes in even lower than that.

 

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Running the numbers – 12 month T-Bills vs 6 month T-Bills (using CPF-OA)

Based on the above, you can already see how the decision on whether to buy 12 or 6 month T-Bills is not straightforward.

Assuming:

1. 6 month T-Bills bought at 4.00% and rolled over at 4.20%
2. 12 month T-Bills bought at 4.00% and rolled over into CPF-OA on maturity

You can see that actually the 6 month T-Bills actually comes out slightly ahead by $100:

BUT – if you can roll over the CPF-IA money into new T-Bills in February 2024 at 4.00%, then the 12 month T-Bills comes out ahead, but only slightly:

The big wildcard is really the yield on the 12 month T-Bills though.

If you drop the yield to 3.8%, then 6 month T-Bills comes out ahead in both scenarios:

There are a lot of variables to consider…

As you can see from the discussion above, there’s really more than meets the eye to this.

You need to know what you will do with the T-Bills money when it comes back to you in January 2024.

You need to know the yield on the 12 month T-Bills.

You need to know where the yield on the 6 month T-Bills will be in 6 months.

You don’t even know if CPF will increase CPF-OA interest rates and make this all for nothing.

I’m not saying 12 month T-Bills are a bad buy with CPF-OA

Just for the record – I’m not saying that the 12 month T-Bills are a bad buy with CPF-OA.

All I’m saying is that a lot of people are touting the 12 month T-Bills as the best thing since sliced bread for CPF-OA investors.

But when you actually crunch the numbers – you find the performance isn’t that much better than the 6 month T-Bills.

There are a lot of assumptions involved, and in certain scenarios the 6 month T-Bills can actually provide a higher return.

That said, the main advantage of the 12 month T-Bills in my view are:

1. If T-Bills interest rates drop drastically in 6 months
2. Saving your time queuing at the bank

If T-Bills interest rates drop drastically in 6 months

The one advantage of the 12 month T-Bills is being able to lock in interest rates for 12 months.

In my numbers above I assumed you can roll over 6 month T-Bills at 4.2% in 6 months time.

So if interest rates are slashed to zero in mid 2023, you’ll come out looking like a genius (if you bought the 12 month T-Bills).

If you look at the yield curve though, the market isn’t really pricing this in for now.

Market is pricing in the big rate cuts to only come 12 months later, some time in 2024:

Personally I dont think the big rate cuts will come in 2023, and I think the markets are underestimating the amount of pain required for big rate cuts.

This is why I assumed T-Bills rolled over at 4.2% in mid 2023.

But frankly, I could be wrong on this.

Save your time queueing at the bank…

That being said, probably the main advantages of the 12 month T-Bills is that you don’t need to go down to the bank and queue again in 6 months time.

Saves you an hour wait, and locks in the interest rates for 12 months.

That’s definitely a plus point.

Although I heard that the banks are working on online applications for CPF-OA to buy T-Bills, so who knows maybe by then it would be all done online.

Must buy T-Bills with CPF-OA?

Quite a few of you are still sitting on the fence and have asked whether it’s worth the effort to buy T-Bills with CPF-OA (whether its 6 month or 12 month T-Bills).

I think the simple answer is that yes, it is worth it if:

1. You have a lot of money in your CPF-OA (that you don’t plan to use this year)
2. You don’t mind spending an hour in the queue at the bank
3. You don’t think CPF will raise CPF-OA interest rates any time soon.

You have a lot of money in your CPF-OA (that you don’t plan to use this year)

For obvious reasons, the more money you have, the more you make by doing this, and the more worth it it gets.

There are some miscellaneous fees involved as well:

• One-time fee of S$2.50 for each transaction
• Quarterly S$2 service fee

So it will only make sense if you have meaningful amounts in your CPF-OA that you don’t plan to use any time soon.

On $100,000, you’ll make slightly over a thousand bucks over the course of a year, so it’s still more than enough to cover the fees.

You don’t mind spending an hour in the queue at the bank

An hour at the bank is not my idea of fun.

I get that you can do groceries while waiting for your number, but still…

You don’t think CPF will raise CPF-OA interest rates any time soon.

Really your guess is as good as mine here.

It’s a political issue too because HDB mortgage rates are pegged to 0.1% above CPF-OA interest rates.

I don’t want to wade into this discussion, so I leave it to you to decide for yourself.

What are the alternatives to T-Bills for CPF-OA?

One alternative is OCBC’s 3.4% fixed deposit for CPF-OA (minimum $20,000).

But if you ask me I think you’re better off with T-Bills as the interest rates are higher.

With OCBC Fixed Deposit you still need to go down to the bank branch, so you might as well just apply for T-Bills instead if you’re going to queue.

Singapore Savings Bonds are just not much better vs CPF-OA, but in any case you can’t buy Singapore Savings Bonds with CPF-OA:

Closing Thoughts: Still worth it? 12 month or 6 months T-Bills?

Long story short – yes, it’s probably still worth it to buy T-Bills with your CPF-OA money.

There are some risks and effort involved, but it’s probably as close to risk-free carry as you would get this year.

That said – the 12 month vs 6 month T-Bills debate is really not so straightforward.

From the numbers above, both come out close enough that I think you could pick either way depending on personal views.

The biggest advantage of the 12 month T-Bills is probably not having to queue at the bank again for a whole 12 months.

 

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