Next T-Bills Auction on 18 Jan – Estimated yield of 4.1% – 4.2%? Better buy than Fixed Deposit or Singapore Savings Bonds? Buy 6 months or 12 months T-Bills?

 

Okay you guys know the drill.

The next 6 month T-Bills auction is on 18 Jan 2023 (Wed).

If you want to apply, you need to get your cash applications in by 9pm on 17 Jan.

Deadline for CPF-OA applications will depend on your bank, but you usually want to get it done at least 1 – 2 days before.

   

3 big questions that I wanted to address:

1. What is the estimated yield on the next T-Bills auction?
2. Are T-Bills still attractive vs Fixed Deposit or Singapore Savings Bonds?
3. Should you buy a 12 month T-Bill instead of 6 months T-Bills? To lock in interest rates?

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

Now the exact cut-off yield for T-Bills is determined by matching supply vs demand, so it cannot be predicted exactly prior to auction.

But we can get some clues from the market pricing.

The previous 6 month T-Bills on 5 January 2023 came in at 4.2% cut-off yield.

While latest 6 month T-Bills trade at 4.19% on the open market.

Latest 12 week MAS bills trade at 4.29% on the open market.

MAS Bills are institutional only products, so they give you a rough idea of what the market is pricing in.

US Interest Rate Trend is down

That being said, the interest rate trend is most definitely down since the past T-Bills auction, especially as US CPI data came in bang on target.

Estimated Yield of 4.1% – 4.2% for the next T-Bills Auction?

So if you ask me, I think you’ll see the yield on the next T-Bills auction come in at around 4.1% – 4.2%.

Give or take 0.1% either way.

Now I do want to caution that the data above is accurate as of 14 Jan 2023.

If you’re putting in a competitive bid, I suggest to bid only the day before (17 Jan).

This gives you a chance to survey the latest market pricing before you put in your bid, as yields could have gone up or down.

Should you submit a competitive or non-competitive bid for the T-Bills auction?

I know that the T-Bills yields have been fairly stable the past few auctions.

And that non-competitive bids are seeing 100% allotment.

That said – I do think it still makes sense to submit a competitive bid though.

Interest rates are on a slight downtrend the past couple of weeks, so there is a small risk of a freak result (yields coming in lower than expected).

Unless of course you really hate bidding, and you want to get a big allotment, then okay maybe non-competitive would make sense.

What yield to submit for competitive bids for T-Bills?

As shared mid-week, OCBC is running a promotion now for OCBC 360 customers.

You can get 4.08% for 8 months on an OCBC fixed deposit (minimum deposit $20,000).

Going up to 4.18% if you’re preferred banking ($200,000).

In my view – if you can get 4.08% on an 8 month fixed deposit from OCBC, that really should be your floor price for competitive bidding.

Any lower, and you’re probably better off just sticking your money in the OCBC fixed deposit.

Remember, Fixed Deposit can be broken early if you need (with a small penalty fee usually in the form of lower interest).

This gives you a very powerful option of added liquidity.

And with Fixed Deposit you don’t need to bother with bidding mechanics, or worrying about allotment amounts.

You just go to online banking and get it done, immediately, with full allotment.

Fixed Deposit is technically only SDIC insured up to $75,000, but cmon – this is OCBC we’re talking about.

Long story short – I probably won’t be bidding below ~4.1% for this T-Bills auction. Even if that means not getting any allotment.

Are T-Bills still attractive vs Fixed Deposit or Singapore Savings Bonds?

The next question then – does it still make sense to buy T-Bills, or just go for Fixed Deposit or Singapore Savings Bonds?

Buy Singapore Savings Bonds vs T-Bills?

Singapore Savings Bonds to me are a very different instrument.

At current levels – the 1 year interest rate on the Singapore Savings Bonds is way below that of T-Bills or Fixed Deposit.

But Singapore Savings Bonds (a) give you the option to hold up to 10 years, and (b) can be withdrawn any time for easy liquidity.

Those who want to buy Singapore Savings Bonds, will buy Singapore Savings Bonds for the above reasons.

So Singapore Savings Bonds vs T-Bills is not really a fair comparison.

The better comparison for T-Bills might be Fixed Deposit.

 

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Buy Fixed Deposit at 4.08% yield instead of T-Bills?

As shared above, OCBC is offering 4.08% on an 8 months fixed deposit.

Going up to 4.18% if you’re preferred banking ($200,000).

That’s frankly quite attractive.

Sidenote that CIMB is offering up to 4.15% for a 12 months fixed deposit (4.2% for preferred banking).

But I’m hearing very long account opening times for CIMB, so OCBC might be a better choice in my view if you already have an OCBC account.

OCBC is also a Singapore bank so you get the peace of mind that comes with that.

Buy Fixed Deposit vs T-Bills?

The calculus always swings back and forth between Fixed Deposit and T-Bills depending on where market interest rates are.

T-Bills interest rates track market interest rates very closely, so they are a great buy when market interest rates are high.

Whereas Fixed Deposit interest rates are set by the bank and tend to be more stable, so they are a great buy when market interest rates are low.

Where we are today, with interest rates coming off quite a bit from the top, I think Fixed Deposit is looking pretty attractive vs T-Bills.

So if you want to dump all your cash in a 4.08% fixed deposit instead of bothering to bid for T-Bills, I’m not gonna fault you.

But if you have some spare cash – doesn’t hurt to put in a competitive bid just in case demand falls off a cliff and yields spike for the auction.

You never know sometimes, and DBS waives the application fee for me so the cost is very low.

It’s just opportunity cost of the cash, and I usually only bid the night before the auction anyway – which means that if it fails I get refunded the cash the next day.

Should you buy a 12 month T-Bill instead of 6 month T-Bills? To lock in interest rates?

January 2023 is one of those months where we’re going to get a 12 month T-Bill (26 Jan auction).

 

Which raises a very interesting question.

Should you buy a 6 month T-Bill, or buy a 12 month T-Bill instead?

The considerations if you’re buying with CPF-OA are quite different and I will run the numbers separately for CPF-OA (because you want to avoid losing as much CPF-OA interest as you can).

But what if you’re buying with cash?

Looking at latest SGS yields, you might be looking at ~4.2% on the 12 month T-Bills.

Is that more attractive than a 6 month T-Bill?

Answer will depend on where interest rates (for T-Bills) go after 6 months

Now the answer to this question will depend on where interest rates are after 6 months.

If interest rates go to 5.0% by mid 2023, then for obvious reasons you’ll look like an idiot locking in at 4.2% for 12 months.

Whereas if interest rates go to 3.5% by mid 2023, then you’ll look like a genius.

So where will interest rates for T-Bills be in 6 months time, in June 2023?

Where does the market think interest rates will be in 6 – 12 months?

This is what the market thinks.

Market thinks interest rates will be slightly higher in 6 months time, but slightly lower in 12 months time.

In other words – market is expecting interest rate cuts at the 6 – 12 months mark, but only a small cut.

Although if you ask me, I think the market may be overly optimistic about the pace of interest rate cuts.

I think interest rates may stay up longer than the market is pricing in.

The only way we get rate cuts earlier is if (1) market crashes, or (2) we get a deep recession.

On (1) – stocks are actually going up in 2023 so far, not going down.

Little reason to panic for the Feds.

On (2) – latest GDP Now is showing the US economy still well in growth.

A recession will come if we stay on this path, but not as soon as people are expecting.

So FH… Will you buy the 6 month T-Bill or 12 month T-Bill?

Looking at the above, I think I still prefer the 6 month T-Bills.

Probably the main consideration for me right now is that T-Bills cannot be easily exited before maturity.

So I’m not super keen to lock up money in a 12 month T-Bill, unless I get a premium on the interest rates.

Especially since my current view is that interest rates should still be high in 6 months.

And looking at current market pricing, it looks like the 6 and 12 month T-Bills will have quite similar interest rates.

So yeah… probably prefer the 6 month T-Bill for now.

What about Fixed Deposit – makes sense to lock in a longer duration?

Of course, the thinking is fundamentally different for Fixed Deposit because FD can be broken any time.

So with FD I think the opportunity cost of locking it up 12 – 18 months is a lot lower, because worst case you can just break it.

But hey – that’s just my view.

For what it’s worth I’ll probably still put in a small competitive bid for the 12 month T-Bills when they come out, just in case we get big and juicy yields.

You never know.

 

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