Why I stopped buying T-Bills at 3% yields? Why I switched to buying short duration bonds / money market funds instead?

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First off – my apologies because I have missed out on covering the past 2 T-Bills auctions (a 6 and 12 month auction respectively).

Some of you have found the T-Bills series of articles helpful and asked me to continue, so I’ll try to do that today.

The long and short is that with the drop in T-Bills yields, I no longer find them a must buy anymore.

What I’ve been doing is putting my cash into a mix of:

  1. Money market fund instruments (like MariInvest) or fintech plays (like Chocolate Finance/GXS/FD) on the short end
  2. Short duration bond funds on the long(er) end

(1) gives me the liquidity at a decent yield, while (2) gives me higher yield (but with the potential drawback of needing to leave the money locked in).

Simplistically if you assume (1) pays about 3% yield today, and (2) pays about 5% yield today, and you blend them in a 50:50 mix.

That’s about a 4% blended yield, with the flexibility to withdraw half of that almost instantly.

In my view that’s been superior to just parking the cash in T-Bills, and is generally what I’ve been doing with my own cash and maturing T-Bills.

3 questions I wanted to discuss today:

  1. Estimated yield on the next 6-month T-Bills auction?
  2. Why I stopped buying T-Bills?
  3. Why I switched to buying short duration bonds / money market funds instead?

Estimated yield on the next 6-month T-Bills auction?

The next 6-month T-Bills auction is on 24 Oct (Thurs) for those keen to apply.

Deadline to apply is therefore:

  • 9pm on 23 Oct (Wed) for cash applications (and CPF-OA applications via DBS or OCBC internet banking)
  • 9pm on 22 Oct (Tues) for UOB CPF-OA applications
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This week’s 12 months T-Bills closed at 2.71%

Note that at this week’s auction, the yields on the 12 month T-Bills fell quite sharply to 2.71%:

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The last time 12 month T-Bills yields were this low was way back in July 2022, super early on in the Fed rate hike cycle.

Chart below shows the 1 year T-Bills yield (candles) vs the Fed Funds rate (red) – you can see how the sharp drop in yield is frontrunning the Fed rate cuts priced into the market.

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6-month T-Bills yields rose to 3.06% at the most recent auction

In the most recent 6-month T-Bills auction, cut-off yields went up slightly to 3.06% (was 2.97% the previous auction).

Despite the fall in T-Bills yields, demand remains very high.

For the 6-month T-Bills, you can see how demand remains very much elevated vs 2023 levels:

While for the 12 month T-Bills demand at $14.7 billion is roughly flat vs the previous auction ($15 billion).

6-month T-Bills yields slide on the open market – trading at 3.01%

On the open market – 6-month T-Bills trade at 3.01%, below the most recent auction at 3.07%.

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That being said – trading liquidity on the T-Bills is so thin that actually the market pricing is not that useful.

So I would caution against placing too much reliance on market pricing on T-Bills.

Market is generally pricing in less rate cuts though – so might be slightly bullish for yields

I suppose the bright side is that because of strong employment and economic data coming out of the US, the market is pricing in less rate cuts from the Feds.

That said there’s still 6 rate cuts priced in for the next 12 months (total of 1.5% in rate cuts to come).

This is slightly bullish for yields, but I would not go so fast as to predict a large rebound in yields for T-Bills.

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T-Bills Supply is flat at $6.8 billion (same as past few auctions)

On the supply side, auction amount is flat at $6.8 billion, so this is neutral for yields.

You can see how the auction amount has stayed flat since about June:

Estimated yield of 2.95% – 3.10% on the 6-month T-Bills auction? 

I’m going with an estimated yield of 2.95% – 3.10% for the next 6-month T-Bills auction.

Market yields are 3.01%, but the fact that markets are pricing in less rate cuts could see some slight upward pressure on yields.

But the fact remains that the market is still expecting 6 rate cuts in the next 12 months, so unless that changes, I don’t see a significant uptick in T-Bills yields.

Why I stopped buying T-Bills at 3% yields? 

At 3%ish on the 6-month T-Bills, and 2.71% on the 12-month T-Bills, I really don’t see them as a must buy anymore.

A year ago when T-Bills were paying 4% yields risk free, they were a no brainer.

But at today’s yields, I think there are a lot of other options there equally if not more attractive than T-Bills.

Why I switched to buying short duration bonds / money market funds instead?

What I’ve been doing is putting my cash into a mix of:

  1. Money market fund instruments (like MariInvest) or fintech plays (like Chocolate Finance/GXS/FD) on the short end
  2. Short duration bond funds on the long(er) end

(1) gives me the liquidity at a decent yield, while (2) gives me higher yield (but with the potential drawback of needing to leave the money locked in).

Simplistically if you assume (1) pays about 3% yield today, and (2) pays about 5% yield today, and you blend them in a 50:50 mix.

That’s about a 4% blended yield, with the flexibility to withdraw half of that almost instantly.

In my view that’s been superior to just parking the cash in T-Bills, and is generally what I’ve been doing with my own cash and maturing T-Bills.

Let me discuss both ends of the barbell quickly.

Money market fund instruments (like MariInvest) or fintech plays (like Chocolate Finance/GXS/FD) on the short end

MariInvest which is a money market fund pays about 3.17% over the past 30 days for me.

As a money market fund investing primarily in MAS Bills, it’s pretty low risk, with competitive yields, with very good liquidity (first $10,000 can be withdrawn instantly, rest is T+1 liquidity).

Alternatively, there’s stuff like Chocolate Finance that even after the drop in rates (on 1 Nov), will pay about 3.6% on the first $20,000 (note that not SDIC insured).

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Even stuff like a DBS Fixed Deposit is paying 3.20% for 12 months, higher than T-Bills:

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While GXS is paying 3.28% for 3 months:

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There is some investor discretion required here as unlike T-Bills, not all the instruments above (eg. Chocolate Finance / money market funds) are risk free, while DBS/GXS will be risk free as long as you stay within SDIC limits.

But in my view, if you know what you’re doing you should be able to get pretty decent 3%+ yield on cash, for very low risk in today’s climate.

And yet retaining the option of instant liquidity (vs a T-Bill where it is very hard to exit before maturity).

Short duration bond funds on the long(er) end

I wrote an extensive article on bond funds yesterday in response to your queries, so do check that out for fuller details.

I extract some key snippets below:

My personal view, is that it’s all about risk-reward.

It is for this exact reason that I advocate building exposure at the short duration bond space, and not the long duration bond space.

If I buy bonds with a 2 – 4 year duration.

If there is indeed a soft landing, default rates will be close to zero, so I collect my 5%+ yield the next few years.

Sure if interest rates go to 5.0% I may suffer capital losses, but given the short duration nature of the bonds those losses will be manageable, and go away the longer I hold the bond funds.

If there is a hard landing, interest rates will get slashed, and there is capital gains potential on these bonds.

The complexity is that in a recession there is default risk for the underlying bonds, but I would say if you’re playing in Investment Grade credit I *think* the defaults will be manageable barring a bad recession.

But of course there is risk, and there is no free lunch in this world.

From a portfolio perspective, the way I see it, with the Feds on a rate cut cycle, it makes sense to shift some funds out of cash and into short duration bond funds.

But I want a mix of both short term cash instruments (<12 month duration) and short term bonds, to cater for a wide range of outcomes.

How to buy a bond fund? Which is the cheapest platform?

There’s broadly 2 options:

  1. Buy via Endowus, Syfe, FSMOne, Bond Supermart etc
  2. Buy via your private banker

In my experience (1) usually tends to be cheaper than (2), but it does vary depending on the fund in question and the promotion in play.

And within (1), Endowus tends to be quite competitive because of the trailer fee rebate, but again it really depends on the fund (some are be cheaper on FSMOne / Bond Supermart).

So f you know exactly which fund you are buying, and are buying a large amount, it’s worth just doing a quick comparison across platforms before you buy (check that it’s the same share class).

It’s messy and imperfect I know, but that’s just how it works today.

Why I switched to buying short duration bonds / money market funds instead?

So that’s what I’ve been doing for my own cash / maturing T-Bills, but I’m not saying that it’s the only way to do it.

There’s no doubt with this approach the bond component does carry risk, so it really depends on the risk appetite of the investor – and some thought is required as to what is your split between cash / bonds.

If you just want something risk free – then you can stick with T-Bills / government bonds.

Deadline to apply for the T-Bills auction on 24 Oct (Thurs)

The next 6-month T-Bills auction is on 24 Oct (Thurs) for those keen to apply.

Deadline to apply is therefore:

  • 9pm on 23 Oct (Wed) for cash applications (and CPF-OA applications via DBS or OCBC internet banking)
  • 9pm on 22 Oct (Tues) for UOB CPF-OA applications
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