Unless you’ve been living under a rock the past few months, you’ve probably already heard of the “buy T-Bills with CPF-OA” trick.
The logic goes like this.
CPF-OA pays 2.5% after the first $20,000.
Latest 6 month T-Bills pay 3.84%.
T-Bills are backed by the Singapore government, and pretty much risk-free.
So buying the T-Bills with CPF-OA is a simple way of increasing the interest earned on your CPF-OA.
All 3 of the local banks allow you to buy T-Bills using CPF-OA moneys online, meaning there’s no need to queue for an hour at the bank anymore.
So if you have some cash lying around in your CPF-OA, it’s worth considering buying T-Bills for a higher interest on CPF-OA.
In this article, I wanted to discuss:
- What are the risks of buying T-Bills with CPF-OA?
- Is it worth it to buy T-Bills with CPF-OA?
- Estimated Yield of the next 6 months T-Bills
What are the risks of buying T-Bills with CPF-OA?
T-Bills are issued by the Singapore government, and backed by the credit rating of the Singapore Government.
So the risk of default is very low.
That doesn’t mean it’s without risk though.
The main risks in my view, are:
- CPF-OA interest rates going up beyond 2.5%
- You will lose CPF-OA interest
- You won’t be able to use the CPF-OA money (locked up)
CPF-OA interest rates going up beyond 2.5%
Let’s put it this way.
If you buy 3.85% yielding T-Bills.
And CPF-OA rates go up to 4.0%.
You would have been better off just leaving the money in CPF-OA instead, especially when you factor in the lost CPF-OA interest (see point 2 below).
So the question then is (1) will CPF-OA interest rates go up, and (2) if yes – when will they go up?
This is a bit of a political question and I’m sure each of you will have your own views on this.
Long story short:
- If you think CPF-OA interest rates will go up, and go up soon, then yes leave your cash in CPF-OA.
- If you don’t think so, then you can consider buying T-Bills.
I myself am buying T-Bills with CPF-OA, so you know where I stand on this one.
You will lose CPF-OA interest (how much depends on the start and end dates)
Do note that the way CPF-OA interest works, is that if you withdraw CPF-OA money for even 1 day in the month, you are going to lose CPF-OA interest for the whole month.
So you want to buy T-Bills with an auction date at the start of the month (while avoiding those with auctions at the end of the month).
This helps you minimise the amount of CPF-OA interest lost.
Next T-Bills Auction – T-Bills issued on 27 June may have this problem for CPF-OA buyers
This is a bit of a problem with the next T-Bills auction.
Because the T-Bills will be issued on 27 June, and mature on 26 December 2023.
This means you will lose the whole month of June’s CPF-OA interest, and you only get the cash back upon maturity of the T-Bills in late December.
Which may not give you enough time to roll over into new T-Bills or withdraw to CPF-OA, especially because of year end public holidays (note that it takes 3 business days to withdraw to CPF-OA if done online).
So do note this point if you are applying for this round of T-Bills with CPF-OA.
If it bothers you a lot you may want to wait for the next T-Bills auction on 6 July, where the T-Bills will be issued on 11 July (and mature on 9 Jan 2024).
You won’t be able to use the CPF-OA money until T-Bills mature (locked up)
The other risk of course, is that if you buy T-Bills with CPF-OA money, you won’t be able to use the CPF-OA moneys until the T-Bills mature 6 months later.
Big point to note if you’re paying your mortgage using CPF-OA funds – you’ll want to make sure you set aside enough cash to cover payments for at least the next 7 months.
Do also note that you’ll need to leave at least $20,000 in CPF-OA, and you can only invest the rest.
Is it worth it to buy T-Bills with CPF-OA? What is the Estimated Yield of the next 6 months T-Bills on 22 June?
Is it worth it to buy T-Bills with CPF-OA?
To answer this question we’ll need to have some rough estimate of where the T-Bills interest rates will close for the next auction.
Let’s try to make an educated guess based off market pricing.
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What is the estimated yield on the next T-Bills auction on 22 June – BS23113V?
6 month T-Bills trade at 3.83%
First off – the 6 month T-Bills trade at 3.83% on the open market.
12 Week MAS Bills closed at 4.15% (vs 4.21% for previous auction)
The most recent auction for the 12 week MAS Bills closed at 4.15%.
This is a slight drop from the previous auction (4.21%) – and does indicate a small downtrend in yields.
Here’s the trading price in MAS Bills.
You can see the trend over the past few weeks which is down from early June peak, when market was pricing in the June hike.
12 week bills are trading at 4.10%, which interestingly is below the 4 week bills (4.13%).
Most Recent T-Bills Auction closed at 3.84% yields
The most recent 6 months T-Bills Auction closed at 3.84%.
You can see this charted below.
Yields are firmly down from the late 2022 highs, but have settled into a 3.8 – 3.9% range since March.
T-Bills application amounts is a wildcard
T-Bills demand usually tends to be a wildcard.
However if you look at the most recent T-Bills auction, application amounts actually fell quite a bit from $12.2 billion to $11.5 billion.
That’s almost a 5% drop and is quite meaningful.
Why exactly T-Bills demand is dropping is unclear, perhaps most investors who already want T-Bills have already gotten their allotment filled.
Will T-Bills yields go higher based on the Fed’s call for 2 more rate hikes?
I’ve been getting some questions on whether T-Bills yields will go higher because the Feds have called for 2 more rate hikes in 2023.
Well, you know where the banks stand on this – because OCBC just slashed their 6 month fixed deposit rates down from 3.0% to 2.7%:
This is what is priced into the US futures curve today.
71% chance of 1 more rate hike.
But the market sees only a 10% chance of a second rate hike from here.
But the market has finally agreed with what I’ve been saying all year – no rate cuts in 2023.
Personal view though – if you look at the SGD yields and MAS bills they barely even reacted post FOMC.
So I doubt you’ll see the T-Bills yields change materially from this.
Next T-Bills Auction – Estimated yields of 3.80% – 3.90%?
In any case, putting everything together.
I think we’ll probably see an estimated range of 3.80% – 3.90% for the next 6 month T-Bills auction.
As always, I encourage investors to submit a competitive bid to avoid any freak results in case yields plunge.
For those doing competitive bidding though, you generally want to make the bid as close to the cut off date as possible.
This gives you time to watch how the market and interest rates play out, which allows you to adjust your bid accordingly.
Is it worth it to buy T-Bills with CPF-OA? In June 2023?
Let’s assume that:
- 6 months T-Bills close at 3.85%
- You have $100,000 in CPF-OA to invest in T-Bills
- CPF-OA interest rates stay at 2.5%
In that case you are making an extra $466.67 over 6 months by doing this “trick” (assuming no increase in CPF-OA interest rates).
Or a 32% increase in interest earned.
Is it worth it?
I leave it for each investor to decide for themselves.
Personal view though – now that you can do it completely online, it really shouldn’t take you more than 5 – 10 minutes to get it done.
Close to $466 for 5 – 10 minutes worth of work is probably worth is in my view.
But it really depends on how much CPF-OA you have available, and of course do note the risks that I flagged above (eg. if CPF-OA rates go up, if you need to use CPF-OA etc).
Is there any alternative to buying T-Bills with CPF-OA? Fixed Deposits with OCBC?
The only alternative used to be CPF Fixed Deposit 3.00% for 6 months with OCBC.
However as of this week, OCBC has taken that option completely off the market.
Frankly I didn’t see why anyone would go for a 3.00% fixed deposit when you can get 3.8% yields on T-Bills though.
This article was written on 16 June 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 sign up as a Patreon.
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