Now there are only 4 12 month T-Bills available for auction in 2023.
And the next one will be available on 20 April 2023.
So those looking to buy T-Bills this month will have the chance of picking between 6 month and 12 month T-Bills.
Given the risk of interest rate cuts over the next 12 months, and given that 12 month T-Bills are trading very close to 6 month T-Bills on the open market.
Should CPF-OA investors switch to buying 12 month T-Bills instead of 6 month T-Bills?
You get to lock in yields for 12 months, and not have to worry about refinancing / rolling over in 6 months time.
In January – I thought that the 6 month T-Bills were a better buy
I looked at the exact same question back in January, and my thinking then was that the 6 month T-Bills were a better buy.
The reason being that back in Jan:
- Those T-Bills were issued at the end of the month, meaning you lost an extra month of CPF-OA interest on maturity
- Good chance of 12 month T-Bills yields coming in low
- Good chance of interest rates being higher or flat in 6 months
A lot of things have changed since January 2023
Well, fast forward 3 months and a lot of things have changed.
Not least a “banking crisis” completely changing the interest rate outlook from the Feds.
Ask me the same question today, and I might say that the 12 month T-Bills are a better buy (if you are using CPF-OA).
Couple of reasons:
- Maturity Date is not the last day of the month
- 12 month T-Bills yields may come in close to the 6 month T-Bills
- Will interest rates be lower in 6 months?
Maturity Date is not the last day of the month
Unlike the January 12 month T-Bills which would mature on 30 Jan 2024 – giving you virtually no time to roll them into new T-Bills or transfer back to CPF-OA.
These 12 month T-Bills will mature on 23 April 2024.
Which means if you are quick about it, you could probably transfer the cash back into CPF-OA before May 2024 – and avoid losing the May 2024 CPF-OA interest.
This alone is a pretty big point in favour of this 12 month T-Bills.
12 month T-Bills yields may come in close to the 6 month T-Bills
You can also see from market pricing that the 6 and 12 month T-Bills have yields that are quite close to each other.
3.80% on the 6 month T-Bills, 3.72% on the 12 month T-Bills.
Reason being that the market is no longer pricing in significant interest rate hikes (or cuts) in the period falling 6 – 12 months from today.
I think you cannot deny that the interest rate climate has changed completely since January 2023.
Which brings us to the next point.
Will interest rates be lower in 6 months?
In January everyone was still expecting the Feds to hike us to 5.5% and beyond.
So in January, the risk for interest rates was still to the upside.
Whereas today, almost everyone accepts that we’re going to see at most 1 more interest rate hike (if at all).
And after last month’s “banking crisis” – investors are starting to get jittery about when interest rate cuts would start coming into play.
Today, the risk for interest rates is to the downside.
My personal view?
My personal view of course, is that we don’t see interest rate cuts in 2023.
But investing is about risk-reward.
If the 6 month T-Bills trade at 3.80%, and the 12 month T-Bills trade at 3.72%.
And if the interest rate risk over the next 12 months is to the downside rather then upside.
Well – I don’t really see the incentive to buy 6 month T-Bills with CPF over 12 month T-Bills, assuming the auction rates are close to market rates.
A simple illustration
A simple illustration on this.
Let’s assume the guy who buys 6 month T-Bills:
- Buys them at 3.80% (latest market pricing)
- Rolls them over at 3.80% in 6 months (big assumption here)
- Rolls over the same month (avoids losing another month of CPF-OA interest)
Whereas the guy who buys 12 month T-Bills:
- Buys them at 3.72% (latest market pricing)
Here are the results.
The guy buying 6 month T-Bills makes an extra $77.22 on $100,000.
That’s absolutely tiny, for the amount of additional work and risk.
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What is the risk taken on by buying 6 month T-Bills?
Because of course – the biggest assumption we used above…
Is that you can roll over CPF-OA into new T-Bills at 3.80% in 6 months’ time (October 2023).
Is this realistic?
Who knows – market seems to be pricing in an economic breakdown in the second half of 2023.
You can see the difference if we assume the 6 month T-Bills are rolled over at 3.5% – suddenly the 12 month T-Bills come out on top.
Not only that, but the guy buying 6 month T-Bills also needs to scramble to roll over the T-Bills into new T-Bills in October 2023.
Whereas the guy with 12 month T-Bills can just sleep in peace knowing he’s locked in his yields for 12 months, and doesn’t need to lift a finger in 6 months’ time.
What is the risk taken on by buying 12 month T-Bills?
Of course, the 12 months T-Bills approach is not without its risks too.
The biggest one being – whether you’ll be able to buy 12-month T-Bills at close to market pricing of 3.72%.
The previous 12 month T-Bills auction in January was quite hotly subscribed, so the cut-off yields came in quite a bit below market pricing.
This is definitely a risk for the April Auction as well.
Especially if many people have the same thinking as I shared above.
Just a quick note that interest rates are very volatile these days.
That is why I try to write these articles as close to the auction date as I can, to increase the accuracy of the forecast.
So trying to predict the yield on the 20 April 12 month T-Bills today is a bit of a fool’s errand, as a lot of things can change between now and then.
So… this is a big risk to note if you want to go with the 12 month T-Bills.
I leave it up to each investor to decide what is the best course of action.
Fixed Deposit not that attractive an option for CPF-OA investors (T-Bills still a better buy)
Just to note that the only Fixed Deposit option available for CPF-OA investors is 3.50% for 6 months with OCBC.
I don’t think this is attractive as it is quite a bit below market yields on T-Bills.
You’re better off just going with T-Bills, especially since the application process is fully online these days.
Timeline to subscribe for the 13 April 6 month T-Bills
In any case, the next 6 month T-Bill Auction is on 13 April.
Those who want to stick with the 6 month T-Bills using CPF should get their applications done by 11 April.
This article is written on 7 April 2023 and will not be updated going forward.
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