6-month T-Bills Auction on 4 Jan – Will interest rates cross 4.0% or drop further? Money Market Funds a better buy than T-Bills?

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So the next T-Bills auction is on 4 Jan.

Unfortunately, after closing as high as 4.07% two months ago.

T-Bills yields have since dropped to 3.73%.

US interest rates have also plunged since late October – the US 10 year yield dropping from 5% to 3.8%.

How will this affect T-Bills yields?

Will T-Bills interest rates drop even further?

Are T-Bills still worth buying – or should you buy money market funds instead?

              

Next T-Bills auction is on 4 Jan (Thursday) – (BS24100F 6-Month T-bill)

First off – next 6 months T-Bills auction is on 4 Jan (Thurs).

This means that:

  • If you’re applying in cash do apply by 9pm on 3 Jan (Wed)
  • If you’re applying using CPF-OA do apply by 2 Jan (Tue)

What is the estimated yield on the next 6-month T-Bills auction? (BS24100F 6-Month T-bill)

I’ll split the analysis up into 2 parts.

From a (1) fundamentals perspective (economic growth, inflation, global interest rates etc), and a (2) technical perspective (supply-demand).

From a (1) Fundamentals perspective:

T-Bills trade at 3.73% on the open market

6-month T-Bills are trading at 3.73% on the open market.

But… T-Bill trading liquidity is incredibly thin

But we’ve seen the past few auctions that trading liquidity on the T-Bills is so thin (just look at trading liquidity in the chart above) – that actually the market pricing is not that indicative.

You’ll find that the market pricing actually takes its cue from the latest T-Bills auction.

The past few auctions where the T-Bills auction yield diverged materially from market price (whether up or down).

It was actually market price that adjusted to the latest T-Bills auction yield, rather than the other way around.

So I would caution against placing too much reliance on market pricing on T-Bills – there just isn’t sufficient trading liquidity for true price discovery.

12-week MAS Bills flat at 4.03%

The institutional only 12-week MAS Bills have been flat the past month or two – at 4.03%.

Sharp moves in MAS Bills are a good indicator of the trend for T-Bills.

So as of now, MAS Bills are not showing any big changes in yields either way.

If you are submitting a competitive bid I do suggest taking a quick look at the latest MAS Bills pricing before you apply.

If there is a sharp move up or down – that could suggest a similar trend for T-Bills (can access it here).

US Interest Rates have plunged – huge expectations for interest rate cuts in 2024

That said – the market is overwhelmingly pricing in interest rate cuts in 2024.

The market today is pricing in 6 interest rate cuts in 2024 – a total of 1.5% in rate cuts:

This has impacted US interest rates (and global rates) across the board.

The US 2 year yield has dropped from 5%+ to 4.2%:

While the US 10 year yield has gone from 5.0% to 3.8%:

So macro wise, you would expect some downward pressure on T-Bills yields here, although SGD yields seem to be flattish.

From a Technicals, supply-demand perspective

From a more micro perspective, what matters is the supply-demand dynamics.

T-Bills Supply is up 9% to $6.1 billion (vs $5.6 billion previous auction)

Let’s start with the good news.

T-Bills supply is going up meaningfully this auction.

The last T-Bills auction only had $5.6 billion T-Bills on offer.

This auction – T-Bills supply is going up 9% to $6.1 billion.

Assuming demand stays roughly the same, you will need to see higher yields to absorb the higher amount of T-Bills.

So this is pretty bullish for T-Bills yields, and might just offset the record demand, and lower interest rate environment.

Demand for T-Bills dropped the previous auction to $12.8 billion (vs $13.3 billion)

In the latest T-Bills auction, demand for T-Bills dropped slightly to $12.8 billion (vs $13.3 billion the previous auction).

This isn’t exactly great news if you think about it – as it shows demand stabilising at record levels despite the downtrend in T-Bills interest rates.

You can see how current levels of T-Bills demand is close to the highest it has been in all of 2023:

This caused T-Bills yields to drop to 3.73% (vs 3.74% the previous auction)

This led to a small drop in T-Bills yields to 3.73% (3.74% the previous auction).

You can see how T-Bills yields are close to the lowest in all of 2023, and yet demand is near record highs.

What about T-Bills demand from 6 months ago?

Some of you have requested for a chart showing T-Bills demand from 6 months ago.

The thinking is that if T-Bills demand was very high 6 months ago, it stands to reason that a lot of that money would be maturing today – contributing to higher T-Bills demand.

I’m not entirely sure if I agree with that line of reasoning.

Because regardless of T-Bills demand, the T-Bills supply doesn’t change.

So if I didn’t get T-Bills 6 months ago, chances are I would have placed it into another instrument (unlikely to be 6 month duration), so the predictive ability of this data may not be high.

Whatever the case, I have plotted T-Bills Application Data with a 6 month lag below.

You can see how 6 months ago, T-Bills demand dropped quite sharply.

Going by this logic, T-Bills demand should drop, which doesn’t really tally with recent data (showing a stabilisation at record levels of demand).

Median Yield – Average Yield spread jumped – a lot of “lowballers”?

To illustrate what this is:

Imagine you have 100 bids.

The median yield, is if you arrange all the bids from small to high, and take the yield of the 50th bid.

While average yield, is adding up the yields of all 100 bids and dividing by 100.

So average yields are skewed by lowball bids, while median yields are not.

To put it simply – the bigger the spread between the median yield and average yield, the more “low-ballers”.

And with the most recent few T-Bills auction before this, spreads completely blew out – close to the highest in 2023.

In the latest auction – spread have actually gone up again:

This indicates that there is still a lot of inelastic demand for T-Bills out there.

Investors are so desperate to get their hands on T-Bills that they are just submitting low-ball bids, to ensure they get an allotment.

Even if this skews yields to the downside.

Estimated yield of 3.65% – 3.85% on the 6-month T-Bills auction? (BS24100F 6-Month T-bill)

Let’s put it all together.

Market is now pricing in up to 6 interest rate cuts in 2024.

This has led to a sharp drop in US interest rates both at the short and long end.

That said, SGD interest rates at the short end still remain relatively flat.

Meanwhile demand for T-Bills remains at record levels, and spread data indicates that bidders are submitting low-ball bids to ensure an allotment.

But the bright side is that T-Bills supply is up meaningfully this auction – a whole 9% higher than last auction.

Given all of the above – I’m actually somewhat optimistic for yields at this next T-Bills auction.

I would probably go with an estimated yield of 3.65% – 3.85% on the next T-Bills auction.

It’s a very tough call, but that’s a small chance that the higher supply, coupled with lower demand over the holiday season, might cause yields to go up.

I will be putting in a competitive bid as well, as I have quite a bit of T-Bills maturing in the next few weeks.

Let’s see.

Should you submit a competitive or non-competitive bid?

I usually encourage investors to submit a competitive bid (just in case there is a freak result and yields drop a lot).

And submit as close to the deadline as you can, so you can take a look at where market pricing is at that time before deciding on your bid.

But I know some investors really don’t like competitive bidding.

In which case non-competitive bidding is probably fine as well (full allotment the previous auction).

But do note that with non-competitive, if there is a freak result and yields drop to 3.0%, you are still forced to buy.

What yield to submit with competitive bidding?

Some of you have asked how to approach competitive bidding for T-Bills.

Apparently there are others out there who are advocating for submitting low bids like 1.5% just to ensure you get an allotment.

I don’t really agree with that kind of reasoning, and if everyone were to do that you’ll see T-Bills close at ridiculously low yields.

I would say to think about the minimum yield you are prepared to buy the T-Bills.

Let’s say any yield below 3.60% and you would prefer to just go with money market funds.

Then a competitive bid around the 3.60% range may make sense.

Don’t forget that you can submit multiple bids.

So you can submit a bid for $20,000 of T-Bills at 3.60%, and another $10,000 at 3.80%.

This allows you to buy more T-Bills if yields close high, and yet still get some if yields close low.

There is no application fee for T-Bills bids too, so this isn’t an issue.

Are T-Bills still worth buying vs Money Market Funds, Singapore Savings Bonds or Fixed Deposit or Savings Accounts?

Money Market Funds pay about 3.6% – 4.1% yield

With the drop in T-Bills yields, Money Market Funds are actually pretty competitive these days.

Mari Invest, which is the money market fund solution via Mari Bank in a tie up with Lion Global, pays about 3.6% – 4.1% (exact yield fluctuates over time due to the nature of the instrument).

Whereas Fullerton SGD Cash Fund pays about 3.6% – 3.9%.

Money Market Funds are technically not risk free though – so this is a big point to note.

That said, they usually invest in a mix of fixed deposits / MAS bills, so the risk is typically on the low side (do be careful with which Money Market Fund you use though).

The benefit though, is that you can get your money back with T+1 liquidity, which is a big plus vs T-Bills

I personally have started putting some money into Money Market Funds instead of T-Bills, due to the liquidity benefits and yields that are competitive vs T-Bills.

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Syfe Cash+ Guaranteed – 4.0% yield for 3 monhs

In case you missed it – Syfe Cash+ Guaranteed now offers 4.0% guaranteed yield on a 3 months deposit.

And 3.8% for a 6 months deposit.

Pretty competitive vs T-Bills.

Just like money market funds, this is technically not risk free, but given that the funds are deposited with banks, risk *should* be on the low side.

But if you want something absolutely risk free, you still need to stick with T-Bills or Singapore Savings Bonds or Fixed Deposits (below the $75,000 SDIC limit).

Singapore Savings Bonds are not an attractive buy

Because of the sharp drop in 10 year interest rates this month.

Singapore Savings Bonds next month are not going to be attractive.

Probably about 2.7% – 2.8% first year yield.

I have enough Singapore Savings Bonds already, so I’m going to skip Singapore Savings Bonds going forward.

Best Fixed Deposit option? Bank of China pays 3.60% for 3 months

The best Fixed Deposit option I could find today is Bank of China which pays:

3.60% for 3 months

3.50% for 6 months

Minimum of $5,000 deposit.

So if you don’t want to buy T-Bills, but want something risk free (below SDIC limit), this is probably the next best thing.

Picking between T-Bills vs Money Market Funds vs Singapore Savings Bonds vs Fixed Deposit vs Savings Accounts?

I would say if you want the highest short term yield, T-Bills / Money Market Funds are probably your best bet today.

Both should have pretty similar yields today.

The benefit of T-Bills is that it’s risk free, and you lock in the rates for 6 months, but at the cost of liquidity.

The benefit of Money Market Funds is that you can get the money back anytime with T+1 liquidity, but it’s technically not risk free, and the rates fluctuate over time.

Singapore Savings Bonds are not as attractive anymore after the drop in 10 year interest rates, so I wouldn’t bother with SSBs unless you’re really desperate to lock in yields.

Where am I parking my cash for liquidity?

Apart from T-Bills, I’ve been parking my cash in a mix of the following for liquidity:

Instrument

Approx Yield

Maximum

UOB One

5%

$100,000

Singapore Savings Bonds

3%+ (based on prior yields)

$200,000

MariBank Account

2.88%

$75,000

Mari Invest (or Fullerton SGD Cash Fund)

3.6% – 4.1%

No maximum (not risk free)

 

Maribank pays 2.88% on up to $75,000, SDIC insured

The Maribank Savings Account pays 2.88% on up to $75,000, with no minimum amount, no hoops to jump through, and SDIC insured.

Pretty much a no brainer if you have spare cash and want to generate a higher yield without any lockup or any requirements to fulfil.

Promo Code for FH Readers (extra $10 Shopee Voucher)

Maribank very kindly reached out to offer an exclusive promo code for FH Readers

Sign up for a Mari Savings Account (using the promo code “MARI28FH”) and get a $10 Shopee voucher with no min spend. 

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Maribank (2.88%) vs GXS (2.68%) or Chocolate Finance (4.5%) for cash

In the past I also tried GXS (2.68%) and Chocolate Finance (4.5%) (now called Core Managed Account by Havenport) for cash.

But MariBank by Shopee has higher yields (2.88%) than GXS while being SDIC insured so it’s a no brainer.

The 2.88% offer has also been extended to 31 March 2024.

While Chocolate Finance is technically not risk free (4.5% on $20,000), so I hesitate on putting too much in as well.

I am applying for T-Bills with Competitive Bidding

I have some T-Bills that are maturing soon.

I’ll likely roll some of that over into T-Bills.

Big question mark over where yields close at, so I will submit a competitive bid to avoid any freak results.

If yields come in below a certain level, I might be better off just parking the funds in a money market fund instead.

Love to hear what you think though – will T-Bills yields go up this auction due to the higher supply? Are you applying for T-Bills?

 

This article was written on 29 Dec 2023 and will not be updated going forward.

For my latest up to date views on markets, my personal REIT and Stock Watchlist, and my personal portfolio positioning, do subscribe for FH Premium.

 

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