Next T-Bills Auction on 24 Nov (4.0 – 4.5% estimated yield) – Submit Competitive or Non-Competitive Bid?

 

Now I know that T-Bills auctions are less popularised than Singapore Savings Bonds.

So I just wanted to do a courtesy shoutout that the next round of T-Bills auction is on 24 November.

If you are putting in a cash application you need to submit by 23 November.

If you’re buying with CPF-OA you probably want to play safe and get it done by 22 November.

I’ve been getting a lot of questions on T-Bills, so I wanted to put this article out to clear any confusion on how T-Bill interest rates are priced, and how does a competitive vs non-competitive bid work.

I’ll split this article into 2 parts, based loosely around these 2 questions (modified lightly from yesterday’s article):

1. Should you still buy T-Bills or just buy Fixed Deposit or Singapore Savings Bonds?
2. Should you apply for competitive or non-competitive bid for T-Bills going forward?

Should you still buy T-Bills or just buy Fixed Deposit or Singapore Savings Bonds?

The answer to this question will depend very much on the interest rates on T-Bills.

How are T-Bills interest rates determined?

Now I get a lot of questions on how T-Bills interest rates are determined.

Let’s give a very simple example.

Imagine:

1. There is $100 worth of T-Bills to be issued
2. $50 of non-competitive bids received
3. $80 of competitive bids received

Out of the $100 issue size – $40 will be set aside for non-competitive bids.

Of the remaining $60, they will be matched to the $100 of competitive bids.

So the competitive bids are arranged from the lowest to highest bids, and the lowest bids are matched first.

The bid yield for the $60^th dollar of competitive bid – and that is the cut-off  yield.

So if the $60^th dollar of competitive bid was 4.0%, that would be the cut-off yield.

And 4.0% would be the yield for this round of T-Bills.

Everybody gets T-Bills at 4.0%, regardless of whether you applied for competitive or non-competitive.

How much allotment does the non-competitive bid get?

Using the example above – 40% of the issue size ($40) is allocated to non-competitive bids.

$50 of non-competitive bids was received, so it will be pro-rated.

Each person who applied non-competitive will get 40/50 allocation, or 80% allotment.

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

Based on the above– trying to predict the exact T-Bill yield in advance is incredibly tough, because it depends on each individual bidder.

That being said, we can still try to make an educated guess based on latest market pricing.

The most recent 3 rounds of 12 week MAS bills closed at 4.4 – 4.6%:

The latest 6 month T-Bill is trading at 4.0% on open market:

The complexity is that the last T-Bill auction showed very high retail demand for T-Bills, which could lead to unpredictable yields (retail tends to be more unpredictable than institutional).

So FH… what’s your estimate on the next T-Bill auction yield?

That being said, I know many of you just want a ballpark figure.

So with the caveat that I could be wildly wrong – I would say a range of 4.0% – 4.5% on the next T-Bills.

But do understand that the final cut-off yield for the T-Bills is determined by matching demand and supply, and cannot be conclusively determined without knowing all the exact auction bids.

Do take my numbers with a healthy pinch of salt.

 

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What if the yield is very low… and I am forced to buy with a non-competitive bid?

With a non-competitive bid you’re buying at whatever the cut-off yield is.

If the cut-off is 3.5%, you’re buying at 3.5%.

If the cut-off yield is 1.5%, you’re buying at 1.5%

Sure, it’s a low risk outcome, but why take the risk when you can just put in a competitive bid for the T-Bills?

How does a competitive bid vs non-competitive bid work for T-BIlls?

Let’s take the most recent T-Bill auction, with a cut-off yield of 4.0%, and 49% allotment for non-competitive bids.

If you applied $100,000 non-competitive, you would get $49,000 T-Bills at 4.0% yield.

If you applied $100,000 competitive at 3.99%, you would get $100,000 T-Bills at 4.0% yield.

If you applied $100,000 competitive at 4.01%, you would get 0 T-Bills.

If you applied $100,000 competitive at 4.00%, you would get some T-Bills depending on the supply-demand matching at 4.00%.

Simple enough?

Should you still bother with T-Bills or just go with Fixed Deposit or Singapore Savings Bonds?

So coming back to this question.

The best Fixed Deposit pays around 3.9% now.

The latest Singapore Savings Bond pays 3.26% first year.

So I would say any T-Bill within my indicative range of 4.0% – 4.5%, probably worth a buy.

Which is easy enough to get around with competitive bidding.

What yield should you bid for competitive bidding for T-Bills?

Unfortunately there’s a bit of a game theory problem here.

Because the lower the yield you bid, the more likely you are to get full allocation.

But the more people that do this, the more likely the cut-off yield is going to drop.

So… I don’t want to comment too much on what yield you should be using for competitive bidding, to avoid messing up the auction dynamics.

All I would say is that the latest MAS T-Bill closed at 4.42% cut-off yield.

That’s probably fair market value to me.

But please for the love of god, don’t submit a competitive bid below the previous cut-off yield of 4.0%.

You’re just spoiling the yield for everyone else. 😉

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