1-year vs 6-month T-bill vs savings account: Which is better?

What happened?

Many of you have asked about what to expect for the upcoming Singapore 1-year T-bill auction on 27^th July 2023.

This is especially so after we saw a decline in the cut-off yield in the latest 6-month T-bill auction to 3.85% from 3.99% in the previous auction.

On the other hand, we’ve seen more options for high yield savings accounts, with GXS bank offering an interest rate of 3.48% p.a. 

Let’s look at the latest indicators to understand whether we might also see a decline in the cut-off yield for the 1-year Singapore T-bill, and if it might be worthwhile considering fixed deposits or savings accounts instead. 

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

The yield on the Singapore 1-year T-bill has been at about 3.65% over the past week, based on daily market prices published by the MAS. 

This is slightly higher than the closing yield on the 1-year T-bill when we checked on 27th June 2023. 

For those who may not remember, the cut-off yield in the previous 1-year T-bill auction on 20^th April 2023 was at 3.58% p.a.

Despite the decline in US government bond yields in recent weeks, the yield on the Singapore 1-year T-bill has been relatively stable. 

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

Some of you have asked if it might be better to invest in two separate tranches of 6-month T-bill rather than the 1-year 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. 

In the most recent 6-month T-bill auction on 20 July, the cut-off yield was at 3.85% p.a., falling from the cut-off yield of 3.99% in the previous auction as demand rose sharply.

This is higher than the current closing yield of the 1-year T-bill of 3.65%.

However, we may face reinvestment risk if we put our money into the 6-month T-bill and should the government bond yields falls sharply in 6-months’ time.

Looking at current investor expectations on the US Fed interest rate decision in the coming year, most investors are expecting the Fed benchmark rate to stay little changed over the next six to nine months.

Based on the CME Fedwatch Tool as of 22 July 2023, investors are expecting that the US Federal Reserve will raise interest rates for one more time in the upcoming meeting on 26^th July, after pausing earlier in June. 

The target Federal Reserve benchmark rate is then expected to the stay at 5.25-5.5% until early next year, before being cut to 5-5.25% in March 2024. 

In fact, investors are expecting the Fed funds rate to be lower than the current level of 5-5.25% only in May 2024. 

However, such expectations may change quickly, especially if a sharp recession were to cause the Fed to cut its interest rates at a faster than expected pace. 

Buying Singapore 1-year T-bill using cash – Better than savings account?

GXS bank recently raised the deposit limit of its savings account, allowing you to earn an interest rate of 3.48% p.a. for savings of up to S$75,000 in a fuss-free way.

CIMB also has an ongoing promotion offering an interest rate of 3.5% p.a. to new customers in July 2023. 

The current closing yield on the Singapore 1-year T-bill of 3.65% is above the interest rate offered on these savings accounts.

You will also be able to lock-in the interest rate on the T-bill, while the interest rate on savings accounts can be subject to change.

However, savings accounts offer you more flexibility as you are able to withdraw your deposits anytime. In fact, GXS bank credits interest to your account daily.

On the other hand, you may face capital losses if you decide to sell the 1-year T-bill prior to maturity. 

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

We have seen Singapore banks cutting their fixed deposit interest rates as they may see less of a need to attract significant deposits. 

The best 12-month fixed deposit rate we found now was 3.55% offered by Maybank.

This would be just slightly lower than the latest closing yield on the 1-year T-bill, as well as the cut-off yield on the previous 1-year T-bill auction.

Also, you will be required to put in a minimum deposit of S$20,000 to earn this interest rate on your fixed deposit. However, you can start investing in the T-bill from as little as $1,000.   

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 about 2.7% for a 1-year T-bill from 2.9% for a 6-month T-bill, assuming the loss of one additional month of CPF interest.

However, we have to be very careful about potentially losing two additional months of CPF interest in the upcoming 1-year T-bill auction. 

With the issue date being on 1st August 2023 and maturity date of 30th July 2024, there is a very short window in July 2024 to transfer funds back to our CPF OA account when the T-bill matures to make sure that we only lose one additional month of CPF interest. 

You’ll effectively have to transfer the funds immediately once you receive them, and count on your bank to be able to transfer the funds back to CPF OA in one day. 

Based on this assumption of one additional month of CPF interest loss, an investment of S$100,000 into the T-bill using CPF funds could potentially lead to a net gain of above S$900 if the cut-off yield on the upcoming 1-year T-bill auction is at 3.58%.

To find out how much more interest you can potentially earn on your CPF savings by investing in the T-bill, check out our CPF-Tbill calculator. 

What would Beansprout do? 

Unlike the fall in US government bond yield and Singapore 6-month T-bill in recent weeks, the closing yield on the 1-year T-bill has been relatively stable. 

The closing yield on the 1-year T-bill is at 3.65% as at 21 July 2023, above the best 12-month fixed deposit interest rate of 3.55% p.a. 

It is also higher than GXS Bank’s interest rate of 3.48% p.a. for the savings pockets in its savings account. 

Hence, we would consider the 1-year Singapore T-bill if we are looking to lock-in the high interest rates for a longer period of time. 

While the cut-off yield on the latest 6-month T-bill is higher than the current yield on the 1-year T-bill, you may face reinvestment risk when the 6-month T-bill matures if interest rates were to fall sharply in the coming months. 

To find out if it is more worthwhile to apply for the 6-month or 1-year T-bill auction using your CPF, check out our CPF-Tbill calculator. 

The auction will be held on 27th July (Thur), which means that we would need to put in our cash applications by 9pm on 26th July (Wed).

The closing date for T-bill applications using CPF-OA differs across the three local banks.

• Applications for T-bills online using CPF OA via DBS close at 12 noon on 25 July. Read our step-by-step guide to applying via DBS. 
• Application for T-bills online using CPF OA via OCBC close at 9pm on 26 July. Read our step-by-step guide to applying via OCBC
• Applications for T-bills online using CPF OA via UOB close at 9pm on 25 July. Read our step-by-step guide to applying via UOB. 

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