Weaker inflation numbers and recent comments from Jerome Powell have led to the market pricing in a lot of interest rate cuts over the next 12 months.
Because of that, the latest 6-month T-Bills closed at 3.64% yield.
This means that if the upcoming 1-year T-Bills has an interest rate of around 3.6%ish (where they are trading on the open market now).
They could be a pretty good buy actually – once you factor in the interest rate cuts in 2024/2025.
The next 1-year T-Bills auction is coming up on 25 July.
3 key questions I wanted to discuss:
- What is the estimated yield on the 1-year T-Bills on 25 July?
- Which is a better buy – the 6-month or 1-year T-Bills? Compared vs Fixed Deposits or Money Market Funds?
- What about for CPF-OA buyers?
And I will also take the chance to share whether I will be applying for the the 1-year T-Bills.
Next 1-year T-Bills auction is on 25 July (Thursday) – (BY24102W 1-Year T-bill)
The next 1-year T-Bills auction is on 25 July (Thursday).
Deadline to apply is therefore:
- 9pm on 24 July (Wed) for cash applications (and CPF-OA applications via DBS or OCBC internet banking)
- 9pm on 23 July (Tues) for UOB CPF-OA applications
Note the next one is 17 October 2024, a whole 3 months away.
So if you want the 1-year T-Bills, don’t miss your chance.
What is the estimated yield on the 1-year T-Bills on 25 July? (BY24102W 1-Year T-bill)
1-year T-Bills trade at 3.57% on the open market
1-year T-Bills are trading at 3.57% on the open market.
But… T-Bill trading liquidity is incredibly thin, so this market pricing is not indicative
That being said the trading liquidity on the T-Bills is so thin that actually the market pricing is not indicative.
Market pricing actually takes its cue from the T-Bills auction, and not the other way round.
So I would caution against placing too much reliance on market pricing on T-Bills.
Market is pricing in a lot of interest rate cuts in the next 12 months
Note that because recent US inflation data has cooled.
And recent comments from Jerome Powell suggests he is likely to start cutting rates in Sep 2024.
The market has started to price in a lot of interest rate cuts over the next 12 months – anywhere from 5 to 6 interest rate cuts.
For 1-year T-Bills, this is not a good sign.
T-Bills Supply is flat at $5.1 billion (exact same amount as the April 2024 auction)
This auction sees $5.1 billion worth of T-Bills on offer, exactly the same as the previous auction.
Demand for 1-year T-Bills tends to be very high – so cut-off yields may come in below market yields
Demand for 1-year T-Bills typically tends to be very high, given that there are only 4 such auctions each year.
1-year T-Bills are particularly attractive for CPF-OA buyers, as you minimise the lost interest when you roll over the 6-month T-Bills.
Because of this most of the previous 1-year T-Bills auctions have cut-off yields that come in below market yields.
For reference:
- In the Jan 2024 T-Bills auction – market yields were 3.75%, while the final cut-off yield was 3.45% – a whole 0.3% lower than the market yield.
- But in the April 2024 auction – market yields were 3.60%, final cut-off yields was very close at 3.58%.
Demand for 6-month T-Bills is at record highs, and yields are on a clear downtrend
Note that demand for the 6-month T-Bills are close to record highs:
While yields are on a clear downtrend the past 4 auctions – dropping to 3.64% at the most recent auction.
Estimated yield of 3.30% – 3.60% on the 6-month T-Bills auction? (BY24102W 1-Year T-bill)
Let’s put it altogether.
Market yields on the 1-year T-Bills are 3.57%.
However the market is pricing in a lot of rate cuts over the next 12 months, so if rates stay at 3.57% they would be a very good buy compared to the 6-month T-Bills (which closed at 3.64%)
Because of that I do anticipate a drop in the 1-year T-Bills yields.
Gun to my head – I think the market yield of 3.57% is likely to be the upper end of the range.
I’m going to go with a conservative 3.30% – 3.60% anticipated yield for the 1-year T-Bills.
Which is a better buy – the 6-month or 1-year T-Bills?
The way I see it, it really depends on the yields you get on the 1-year T-Bills.
Let’s say worst case the 1-year T-Bills come in at 3.3% yield.
If you buy the latest 6-month T-Bills at 3.64% yield, as long as you can roll over the cash into 3.00% or more yields in 6 months time, you’re probably ahead.
Whereas the higher the yields on the 1-year T-Bills, the more attractive they are.
So for cash buyers, a competitive bid could be a good way around the issue.
Maybe at 3.30% you’re better off just sticking with 6-month T-Bills, but at 3.50% it’s a good buy… you get my point on the competitive bidding.
What about for CPF-OA buyers? Buy 6-month T-Bills or 12-month T-Bills?
That being said for CPF-OA buyers the 1-year T-Bills are pretty attractive because:
- You lock in interest rates for the next 1-year (in fact you get the interest upfront)
- You minimise the lost interest from when you roll over 6-month T-Bills
The logic above on where yields will be in 6 months continues to apply.
But because of the lost interest dynamics on CPF-OA, I think the 1-year T-Bills are comparatively much more attractive for CPF-OA buyers.
Especially if you don’t need to use the CPF-OA money, and even something like 3.40% is higher than the 2.5% paid if you leave in CPF-OA.
OCBC has a CPF Fixed Deposit – but only pays 2.8% for 1 year on CPF-OA
Do note that OCBC has a CPF-OA Fixed Deposit.
However the interest rate is not attractive – 2.80% for 12 months.
You’re better off just buying T-Bills.
Even if demand is very high, I doubt the 1-year T-Bills would come in below 2.80%.
Which is a better buy – T-Bills vs Fixed Deposits or Money Market Funds?
For cash buyers, I compared against some alternative options below.
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Singapore Savings Bonds pay 3.19% for 1-year
The latest Singapore Savings Bonds pay:
- 3.19% for the first 6 years
- 3.22% for 10 years
This makes the SSBs a pretty decent buy if you think the 1-year T-Bills yields are going to drop this auction.
Money Market Funds pay about 3.5% – 3.8% yield – but not risk free, and yields can change any time
Money Market Fund yields have been sitting at the 3.5% – 3.8% range for a while now.
Money Market Funds are technically not risk free though – so this is a big point to note.
And Money Market Funds invest in short term instruments, so the interest rates will fluctuate from time to time.
This is unlike a 1-year T-Bill where you are “locking in” interest rates for the full 1-year.
The benefit though, is that you can get your money back with T+1 liquidity, which is a big plus vs T-Bills.
Best Fixed Deposit option? 3.20% for 1-year with DBS/POSB Bank
The best fixed deposit option for 12-months is 3.20% with DBS / POSB Bank (or State Bank of India).
If you’re comfortable using Syfe Cash+ Guaranteed (where you deposit with Syfe who parks the funds in an institutional fixed deposit account for higher yields).
Then the yields are 3.45%, but do note that this is NOT SDIC insured (and therefore not risk free).
Will I buy 1-year T-Bills vs Money Market Funds vs Singapore Savings Bonds vs Fixed Deposit vs Savings Accounts?
At this point in the interest rate cycle, I think you want to spread your cash around various tenures, given the risk of interest rate cuts going forward.
You want to hold some instruments that can lock in yields:
- T-Bills (both 6-months and 12-months)
- Singapore Savings Bonds
- Bonds (eg. Astrea Bonds)
While also retaining some liquidity:
- High yield savings accounts
- Money Market Funds
Personally I think I will apply for the 1-year T-Bills.
But I will use a competitive bid.
I think that if the 1-year T-Bills yields come in at the lower end of my projected 3.30 – 3.60% range, they’re not super attractive when you factor in the fact that this money is completely locked up for 12 months.
But if they came in at the higher end of the range, they could be pretty attractive given all the uncertainty over interest rate cuts going forward.
That’s just my view though, would leave to hear what you think!
This article was written on 19 July 2024 and will not be updated going forward.
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