Is the 1-Year T-bill better than fixed deposits and the 6-month T-bill?

What happened?

The Singapore 1-year T-bill auction is always much anticipated by investors.

After all, while the auction for the 6-month T-bill occurs every two weeks, the 1-year T-bill auction only happens once a quarter. 

This naturally led to questions about whether it might be worthwhile putting our spare cash in the upcoming 1-year T-bill auction (BY23101W) on 20 April 2023. 

What is the expected yield on the 1-year T-bill?

The yield on the Singapore 1-year treasury bill has been at about 3.7% over the past week, based on daily market prices published by the MAS. 

Despite the volatility in US government bond yields, Singapore government bond yields have been relatively stable. 

As a recap, the cut-off yield in the previous 1-year T-bill auction on 26^th January 2023 was at 3.87% p.a.

Singapore government bond yields have fallen since then in tandem with US government bond yields, as investors increasingly expect that the Fed will end its aggressive interest rate hikes. 

Buying Singapore 1-year T-bill using cash – Better than fixed deposit?

For investors who are considering buying the Singapore 1-year T-bill using cash, there are a few potential alternatives. 

The first is to lock up the interest rates for the next 1-year using fixed deposit.  

For investors who have a lot of spare cash, there are several foreign banks which are still offering 12-month fixed deposit rates of 4%. However, they will require a minimum deposit amount of S$50,000 and above. 

Those looking at a smaller investment amount can possibly get an interest rate of 3.9% with a S$20,000 fixed deposit. 

However, for an even smaller deposit amount, the best 12-month fixed deposit interest rate available currently is 3.75%. 

If the cut-off yield on the 12-month T-bill were to end up close to the current market yield of 3.7%, then it would be quite close to these fixed deposit rates.

Buying Singapore 1-year T-bill using cash – Better than 6-month T-bill? 

The next alternative is to consider is to invest in two separate tranches of 6-month T-bill. Specifically, we can invest in the upcoming 6-month T-bill auction, and re-invest the funds when the T-bill matures in six months’ time. 

We saw that in the most recent 6-month T-bill auction on 13^th April that the cut-off yield was at 3.75% p.a., falling slightly from the cut-off yield of 3.85% in the previous auction.  

Government bond yields have been falling since the start of the year as easing inflation and rising recession concerns have led to investors expecting that the Fed will pause on its aggressive interest rate hikes. 

In fact, a large number of economists are expecting that the Fed will cut its reference rate by September this year. 

Hence, by choosing to invest in the 6-month T-bill repeatedly rather than in the 1-year T-bill, we may potentially face re-investment risk where we are getting a lower yield when our funds mature. 

This is exactly what we have seen since the start of the year, with the 6-month Singapore government bond yield has falling to about 3.7% from above 4%. 

Buying Singapore 1-year T-bill using CPF – Is it worth it?

We shared earlier that due to the loss of CPF interest, it is generally more worthwhile to use your CPF funds to invest in the T-bill when the bond has a longer maturity.

For example, the breakeven cut-off yield for T-bill applications using CPF OA falls to 2.71% for a 1-year T-bill from 2.92% for a 6-month T-bill, assuming the loss of one additional month of CPF interest.

There has been some discussion in the Beansprout community about what is the number of months of CPF interest loss for the upcoming 1-year T-bill auction. 

With the issue date being 25^th April 2023 and maturity date of 23th April 2024, it would seem like there will just be a one additional month of CPF interest lost, assuming that we make an instruction to transfer the funds back to our CPF OA accounts from CPFIA as soon as the T-bill matures. 

If the cut-off yield on the upcoming 1-year T-bill auction is at 3.7%, an investment of S$100,000 into the T-bill could potentially lead to a net gain of about S$980 compared to the CPF OA rate of 2.5%, after deducting fees. 

What would Beansprout do?

With interest rates coming down, some investors may prefer the 1-year Singapore T-bill over the 6-month T-bill in allowing us to lock-in interest rates and not worry about reinvestment risk. 

One way to make sure we do not end up buying the T-bill at a lower than expected bond yield  is to consider putting in a competitive bid in the auction.

We can also choose to refer to the latest fixed deposit rates to determine the yield to bid for the T-bill. The best 12 month fixed deposit rate for deposits above S$50,000 is at about 4%. However, the best fixed deposit rate for smaller deposit amounts is about 3.75%. 

For CPF investments, it is generally more worthwhile to invest in the 1-year Singapore T-bill compared to the 6-month T-bill.

If the cut-off yield on the upcoming 1-year T-bill auction is close to the current market yield of 3.7%, an investment of S$100,000 into the T-bill could potentially lead to a net gain of about S$980 compared to leaving the money in your CPF account. 

The auction will be held on 20 April (Thur), which means that we would need to put in our cash applications by 19 April (Wed). 

Applications for T-bills online using CPF OA via OCBC close at 9pm on 19 April. Check out how you can apply for T-Bills online using CPF OA via OCBC. 

Applications for T-bills using CPF OA via DBS i-banking close slightly earlier at noon on 18 April (Tue). Check out how you can apply for T-Bills using CPF OA via DBS i-banking. 

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