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

What happened?

After we shared our thoughts on the upcoming 6-month Singapore T-bill auction, we received many questions on whether we would apply for the 6-month T-bill or 1-year T-bill.

Many of you have probably noticed that there will be an upcoming 1-year Singapore T-bill (BY24100T) auction on 25^th January.

This would mean the auction would take place just 1 week after the 6-month Singapore T-bill auction on 18^th January. 

For those of us who are looking to make out savings work harder, it would make sense to find out whether the 6-month or 1-year T-bill would allow us to earn a higher potential interest.

Let us look at what the indicators are telling us to find out!

Will the yield on the 1-year T-bill be higher than the 6-month T-bill?

The closing yield on the 1-year Singapore T-bill has been at 3.75% over the past week, based on daily market prices published by the MAS. 

This would be similar to the closing yield on the 6-month Singapore T-bill of 3.75%.

Despite the fall in US government bond yields, the yield on the 1-year Singapore T-bill has been fairly stable. 

As a recap, the cut-off yield in the previous 1-year T-bill auction on 19^th October 2023 was at 3.7% p.a.

After rising slightly in November to reach close to 3.9%, the 1-year Singapore government bond yield is now back to where it was in October. 

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

Rather than apply for the 1-year T-bill, one option 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. 

If we apply for the 6-month T-bill on 18 January, the maturity of the T-bill will be on 23 July 2024.

The next 6-month T-bill that we can potentially apply for with our funds will be on 1 August 2024, and the 6-month T-bill will mature on 4 Feb 2025.

Earlier, we shared that the closing yield on the 6-month T-bill is at 3.75%, which is similar to the closing yield on the 1-year T-bill.

To decide if it is better to buy the 1-year T-bill or the 6-month T-bill, the question we can ask ourselves is whether we should lock-in the yield for 12 months, or face potential re-investment risk if government bond yields were to fall sharply in 6-months’ time. 

In its latest meeting, the Fed indicated that interest rates may be cut in 2024. 

According to the CME Fedwatch Tool, investors are currently expecting the Fed to start cutting interest rates in March 2024. 

Investors expect interest rates to be further reduced in the first half of 2024, and have assigned more than 50% probability that interest rates will be 100 basis points or 1% lower in July 2024 compared to the current level. 

If interest rates were to fall so significantly in the coming months, we may get a lower yield on the T-bill when re-investing our funds in the 6-month T-bill in August. 

Over the past year, we have already seen a decline in the yield on the 6-month Singapore T-bill from its peak of above 4% in December 2022. 

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.

For the upcoming 1-year T-bill auction on 25 Jan, the issue date will be 30 Jan 2024, and the maturity date will be on 28 Jan 2025. 

If we are not looking to re-invest our funds into the next T-bill, we will potentially lose 13 months of CPF interest by investing in the 1-year T-bill using our CPF savings, assuming we transfer funds back to our CPF OA account immediately when the T-bill matures. 

On the other hand, we will potentially lose 14 months of CPF interest by investing in two separate tranches of the 6-month T-bill, as the second tranche of the 6-month T-bill will only mature on 4 Feb 2025.

To find out how much more interest you can potentially earn on your CPF savings by investing in the 1-year T-bill, check out our CPF-Tbill calculator. 

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

Singapore banks have been lowering their fixed deposit interest rates in recent months. 

Currently, the best 1-year fixed deposit rate we found is at 3.30% p.a. 

This would be lower than the latest closing yield of 3.75% on the 1-year T-bill, as well as the cut-off yield of 3.7% in the previous 1-year T-bill auction.

Also, you will be required to put in a minimum deposit of S$5,000 to earn this interest rate on your fixed deposit. However, you can start investing in the T-bill from as little as $1,000.   

What would Beansprout do?

The current closing yield of the 1-year Singapore T-bill is similar to the closing yield of the 6-month T-bill at 3.75%. 

However, some investors may prefer the 1-year Singapore T-bill over the 6-month Singapore T-bill to lock in the interest rates and not worry about re-investment risk.

This is especially so with an increasing likelihood that the Fed may cut interest rates in the coming months. 

However, it is worth noting that such expectations may change quickly if inflation picks up again and   Fed cuts interest rates at a slower than expected pace. 

Another reason that some investors may prefer the 1-year Singapore T-bill over the 6-month T-bill is to reduce the loss of additional CPF interest.

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. 

The good news for T-bill investors is that whether you decide to invest in the 6-month or 1-year T-bill, the current closing yields are higher than the best fixed deposit rates. 

As such, we would consider the 1-year T-bill as a safe way to earn a higher return on our savings, especially if we are looking to lock in interest rates for a longer period of time compared to the 6-month T-bill. 

To learn more about T-bills and find out how to apply, check out our Comprehensive Guide to T-bills.

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