Next T-Bill Auction on 16 February – Estimated yield of 3.85% – 3.95%? Should you buy T-Bills or Fixed Deposit with CPF-OA?

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Okay, so the next 6 month T-Bills auction is on 16 February.

Given that interest rates are starting to drop globally, I’ve been getting a couple of questions on the estimated yield of the T-Bills.

And perhaps more interesting – you can now buy T-Bills online with CPF-OA, which means no need to queue for an hour at the bank.

That’s basically an easy way to earn a much higher 3.88% interest on your CPF-OA.

And… OCBC just unveiled a 3.88% Fixed Deposit (8 month) specially for CPF-OA funds this week.

Is that a better buy than T-Bills?

Boy… we’ve got a lot to discuss today.

      

What is the estimated yield on the next 6-month T-Bills auction?

Let’s start by discussing estimated yield on the 6-month T-Bills.

12 week MAS Bills – 4.09%

Latest 12 week MAS Bills trade at about 4.09% today.

These are institutional only products that cannot be bought by retail investors (or CPF), so you would expect T-Bills to come in lower than 4.09%.

SGS Yields – 3.90% for 6 month T-Bills

Whereas the 6 month T-Bills trade at 3.90% on the open market.

For reference, the previous 6 month T-Bills auction came in at 3.88% cut-off yield.

Retail Demand from CPF-OA may skew yields (downward)

I suppose the big wildcard for T-Bills (as it has been the past few months), is retail demand.

If retail demand is big, then yields will be on the low side.

If retail forgets about T-Bills, then yields will be on the high side.

And no discussion on retail demand for T-Bills will be complete without a discussion on CPF-OA.

T-Bills demand is overwhelmingly from CPF-OA?

Straits Times did a very interesting article on buying T-Bills with CPF-OA recently.

It seems that much of the T-Bill demand is coming from CPF-OA funds:

In the most recent T-bill auction last Thursday, DBS said nine in 10 T-bill applications were made online using CPF funds.

And perhaps more interestingly, was the discussion on whether CPF-OA rates will be increased beyond 2.5% going forward:

“On Tuesday, Manpower Minister Tan See Leng responded to a parliamentary question on whether there are plans to incentivise CPF members with high OA savings to tap alternative options for higher interest earnings.

He said they could put their CPF funds into short-term Singapore Government Securities (SGS) products like T-bills.

He added that OCBC and UOB customers will be able to use their CPF savings to apply for T-bills online by the first quarter of 2023, after DBS Bank first allowed customers to do so in late January.

OCBC confirmed to The Straits Times on Tuesday evening that its customers will be able to use their mobile apps and Internet banking accounts to invest their OA and Special Account (SA) funds in T-bills from March.”

Okay I mean I’m not the best horse at interpreting political decisions, and I definitely could be wrong on this.

But my plain reading of this, is that okay maybe there are no immediate plans to raise CPF-OA interest rates, but investors who want a higher yield can park their CPF-OA in T-Bills?

Especially since you can buy T-Bills online with CPF-OA?

Estimated Yield on the next 6 month T-Bills – 3.85% – 3.95%

So I suppose the simple answer is that you’re going to see a lot more demand for T-Bills (from CPF-OA funds) going forward, especially since it can be done online now.

That will probably keep a lid on T-Bills yield at least in the short term.

All things considered, I’ll probably go with an indicative range of 3.85% – 3.95% on the next 6 month T-Bills auction.

Give or take maybe 0.05% each way.

 

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Buy T-Bills online with CPF-OA (DBS Online Banking only)

Since we’re on the topic of CPF-OA, here’s a big shoutout that you can now buy T-Bills online using CPF-OA.

Do note that this is exclusive to DBS online banking only (for now).

This means that you MUST have your CPF-IA account with DBS.

The application process is exactly the same as how you would normally buy T-Bills.

The only difference is that when you get to the application page you select CPF-OA instead of cash or SRS:

What if your CPF-IA account is not with DBS?

If your CPF-IA account is not with DBS, then your options are:

  1. Transfer your CPF-IA account to DBS
  2. Wait for UOB/OCBC to implement the online feature

Transfer your CPF-IA account from UOB/OCBC to DBS

To transfer your CPF-IA account to DBS, you need to go down physically to the bank branch to fill up some forms.

And it does take some time to complete the transfer, so it’s a bit of a hassle.

Although I do recall some members in the FH Group Chat complaining that other local banks (not naming names) cannot be contacted by phone if there are any problems, whereas DBS can.

If this matters a lot for you, then I do suppose transferring your CPF-IA account could make sense.

Wait for UOB/OCBC to implement the feature

Alternatively you could just wait for UOB or OCBC to implement online applications for T-Bills via CPF-OA.

Per timeline from the Straits Times, it should likely be done by the first quarter this year, which means 1 – 2 more months wait tops:

“He added that OCBC and UOB customers will be able to use their CPF savings to apply for T-bills online by the first quarter of 2023, after DBS Bank first allowed customers to do so in late January.

OCBC confirmed to The Straits Times on Tuesday evening that its customers will be able to use their mobile apps and Internet banking accounts to invest their OA and Special Account (SA) funds in T-bills from March.”

If it were me I would probably just wait – seems funny that to avoid the hassle of going down to the bank to apply T-Bills in person, your preference is to go down to the bank to transfer your CPF-IA account to another bank so that you can apply for T-Bills online.

But hey – I’m not judging, and I’m lucky because my CPF-IA account is held with DBS.

If you have no CPF-IA account at all, then it’s a simple choice to just go with DBS (note that if you’re opening CPF-IA account for the first time you need to complete a quiz (CPF Investment Scheme Self-Awareness Questionnaire) to judge that you know the risks of investing your CPF-OA).

Is it worth it to buy 6 month T-Bills using CPF-OA?

I know many of you are asking this question, so I decided to run the numbers.

Let’s say we assume that:

  • $100,000 of T-Bills are bought at 3.85% (using CPF-OA)
  • CPF-OA interest rate does not change for the next 6 months (stays at 2.5%)

Then you will make an extra $466.67 over the next 6 months by buying T-Bills with CPF-OA.

Which is a 32.0% increase in the interest earned.

Is this worth it?

I mean previously when you had to go down to the bank to queue for an hour I think it was debateable depending on how much you valued your time.

But when you can do it online, I suppose there really is no excuse to avoid doing it.

Even if you are not so IT savvy it takes maybe a couple minutes tops to get it done, and the 32.0% increase in interest is not so shabby.

Is OCBC Fixed Deposit for CPF a better buy? 3.88% for 8 months

That said, OCBC just unveiled a new fixed deposit for CPF-OA accounts this week.

Offering a 3.88% interest on CPF-OA:

The drawback of course is that this cannot be done online, and you need to go down to OCBC in person (you don’t need to have your CPF-IA account with OCBC).

But assuming you do, is this a better deal than 6 month T-Bills?

I ran the numbers below, assuming that:

  • $100,000 of T-Bills are bought at 3.85% vs the same amount in OCBC’s 8 month Fixed Deposit
  • In both cases – I assumed that the T-Bills/Fixed Deposit are not rolled over the same month upon maturity, but the following month (ie. You lose 1 month of CPF-OA interest)

Here are the results over the next 12 months:

As you can see, the numbers are very close.

The reason why the 8 month OCBC Fixed Deposit comes out on top slightly is because I am using a 12 month period.

Which means for the 8 month OCBC Fixed Deposit you only count 1.5 cycles, whereas with the 6 month T-Bills you are counting 2 full cycles.

Ie. With the 6 month T-Bills you lose 2 months interest using this method of calculation, whereas with the 8 month Fixed Deposit you lose 1.5 months only.

So this is purely down to the method of calculation, and if you run it over a 16 month period for example then the results look very different.

Long story short – the returns between the two are probably very close.

The biggest factor would probably be what interest rate the T-Bills / Fixed Deposit is rolled over at when they mature in 6 / 8 months time.

What are the factors to consider when buying T-Bills or Fixed Deposit with CPF-OA?

Whether you are buying T-Bills or Fixed Deposit with CPF-OA though, the main considerations are broadly the same.

Namely – you want to get it done early in the month to avoid losing a second month of CPF interest.

This is because of a quirk in how CPF calculates the interest – in that you will lose the whole month of CPF-OA interest regardless of whether you withdraw/deposit from CPF-OA at the start of the month or the beginning of the month.

So if you buy using CPF-OA at the end of the month, you still lose that whole month’s CPF-OA interest.

And when it matures down the road, you get the money at the end of that month.

That doesn’t give you enough time to return the money into CPF-OA (about 3 working days), or to roll over into new T-Bills (need to wait for the auction).

It rolls over into the next month, and you lose the next month’s CPF-OA interest.

So as far as possible, you want to try to buy the T-Bills or Fixed Deposit earlier in the month, rather than later in the month.

To get the most bank for your buck, so to speak.

So… Buy T-Bills or OCBC Fixed Deposit with CPF-OA?

I think the performance for the two will be frankly very close.

The biggest factor would probably be what interest rate the T-Bills / Fixed Deposit is rolled over at when they mature.

As many of you know, my current view is that interest rates will go down or stay flattish in the short term.

Before going up again mid term as economic growth (and inflation) starts to pick up again.

But as to whether interest rates go up in 6 months or 8 months, that’s not an easy call.

Gun to my head, I’ll probably just go with T-Bills online because it avoids the hassle of going down to the bank physically.

But you guys can see the analysis above, and decide accordingly for yourself.

Deadline to apply for 6 month T-Bills auction

In any case my estimated yield for the next 6 month T-Bills auction is 3.85 – 3.95%.

If you don’t want to do competitive bidding you could probably put in a non-competitive bid as they have been seeing 100% allotment the past few auctions.

This does open you up to the possibility of a freak result though, so I would probably still stick with competitive bids.

Deadline wise, you need to submit by 12 noon on 14 February 2023 if you are buying using CPF-OA.

Otherwise, deadline is 9pm on 15 February 2023 if you are buying with cash / SRS.

 

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