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

What happened?

Many in the Beansprout community have been asking about the upcoming Singapore 1-year T-bill. 

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

This led to some discussion about whether it might be worthwhile to put our savings in the upcoming 1-year T-bill auction (BY23102N) on 27 July 2023. 

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

The yield on the Singapore 1-year T-bill has been at about 3.6% over the past week, based on daily market prices published by the MAS. 

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

As a recap, the cut-off yield in the previous 1-year T-bill auction on 20^th April 2023 was at 3.58% p.a.

After falling slightly in May with expectations that the Fed might pause on its interest rate hikes, the 1-year Singapore government bond yield is now back to where it was in April. 

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

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

Recently, we saw UOB and OCBC cutting their 6-month fixed deposit rate to 2.7%, representing the first time it has fallen below 3% this year. 

Currently, the best 12-month fixed deposit rate we found was 3.55% offered by both RHB and 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.

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 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. 

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. 

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

One alternative 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 22 June that the cut-off yield was at 3.89% p.a., rising from the cut-off yield of 3.84% in the previous auction as demand fell.

This is higher than the current closing yield of the 1-year T-bill of 3.6%

However, in doing so we may face potential re-investment risk if government bond yields were to fall sharply in 6-months’ time. 

This may not be what investors are currently expecting, with Fed Chairman Jerome Powell suggesting that there may be potentially another two rate hikes this year.

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. 

What would Beansprout do? 

The current closing yield of the 6-month Singapore T-bill is higher than the closing yield of the 1-year T-bill.

This may make the 6-month T-bill look more attractive to some investors who are just looking at earning the highest possible yield in the near term. 

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

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. 

However, we need to be very careful in the upcoming auction on 27^th July to ensure that we do not lose two additional months of CPF interest. 

The good news for T-bill investors is that the closing yield on the 6-month and 1-year T-bill are currently higher than the best fixed deposit rates. 

With the upcoming 1-year T-bill auction still about a month away, we’ll continue to check on the latest market developments to determine if it might still be worthwhile to invest in the 1-year T-bill when applications open on 20 July. 

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. 

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