Should you buy the 6-month or 1-year T-bill? Here's how we're deciding.

TL;DR

• The 6-month T-bill and 12-month T-bill are both offering a yield of about 4.2% per annum currently. 
• The decision on whether to buy the 6-month T-bill or 12-month T-bill depends largely on your expectations on inflation and interest rates. 
• The 1-year T-bill offers an opportunity to lock in interest rates and remove reinvestment risks for 1 year.
• If you do not want to take a view on interest rates, we can consider building a diversified portfolio or bond ladder.  We can also consider our opportunity costs by comparing the interest rates on fixed deposit accounts. 

What happened?

The financial markets often offer lots of opportunities at the start of the year. 

For investors of Singapore treasury bills (T-bills), the next few weeks will also be extremely busy with a number of auctions coming up.

Firstly, we have the 6-month T-bill (BS23101S) auction on 18 January.

Next, we have the 1-year T-bill (BY23100X) auction on 26 January. 

Lastly, we have the 10 year-SGS bond (NX22100W) auction on 27 January. 

The numerous options led to a question in the Beansprout community – would we buy the 6-month T-bill or the 12-month T-bill if we have limited spare cash?

Would we buy the 6-month of 12-month T-bill?

If you participated in the previous 6-month T-bill auctions, you would have to make the decision of whether to make competitive or non-competitive bids. 

If you were making a competitive bid, you would then have to make a choice of what yield to make the competitive bid at. 

Now, you also have the option of choosing between the 6-month T-bill and 1-year T-bill. 

This is not an easy question to answer. 

Even if we are certain that we have no liquidity needs for our spare cash over the next 12 months, there are still a few questions we would be asking ourselves to decide between the 6-month T-bill and the 1-year T-bill. 

What we would be asking ourselves:

• What are expected yields for the 6-month and 12-month T-bill?
• Will interest rates continue to go up sharply?
• What is the opportunity cost?

#1 - What are expected yields for the 6-month and 12-month T-bill?

Firstly, let’s take a look at what is the current yield on the 6-month and 1-year T-bill.

As of 13 Jan 2023, the yield on the 6-month T-bill is at 4.19% p.a, while the yield on the 1-year T-bill is at 4.20%.

Over the past week, the yield on both T-bills have been hovering at around 4.2%.

The yield on the 1-year T-bill has been slightly higher on all days, but not much. 

#2 – Will interest rates continue to go up sharply?

We’ve seen big movements in interest rates over the past 12 months. 

While the difference in the yield in the 6-month T-bill and 1-year T-bill is not significantly currently, we want to make sure that we do not get lower interest payments because of such interest rate movements. 

Here, it is important to note that when we buy the 6-month T-bill, we would face reinvestment risk 6 months later when the bonds mature.

If interest rates go up more than expected, then we might get a higher yield when we invest our money again 6 months later.

However, if interest rates were to not go up as much as expected (or even fall), then we might get a lower yield subsequently. 

Here, we can take reference to what economists are expecting interest rates in the US to be 6 and 12 months later. 

After all, interest rates in Singapore tend to follow interest rate trends in the US.

The benchmark interest rate in the US is expected to rise from 4.25-4.50% currently to 4.75-5.00% in March. 

Interestingly, a sizeable number of economists are expecting that interest rates might be cut by November this year. 

As a result, we might be back to the current benchmark rate of 4.25-4.50% by the end of the year. 

This is likely the reason the yield on the 6-month T-bill is quite close to the yield on the 12-month T-bill currently. 

The key question is how eventual interest rates could diverge from current forecasts. 

If inflation remains persistently high, then interest rates might be end up higher than current expectations.

However, if the US economy slows down significantly and there is a deep recession, then the Fed might cut interest rates at a faster pace than current expectations. 

#3 – Are we making the purchase using CPF?

As we shared previously, you will lose at least additional month of CPF OA interest when you purchase the T-bill using your CPF funds, on top of the time period it takes for the bond to mature.

This is because the CPF interest payment is computed based on the lowest balance for the month, rather than the average balance of the month. 

Using the upcoming BS23101S 6-month T-bill as an example, you will lose 7 months of CPF OA interest from January to July when you purchase the T-bill using your CPF. 

For the upcoming 1-year T-bill auction, some members in the Beansprout community have pointed out that you will potentially lose 14 months of CPF OA interest when you purchase the T-bill using your CPF. 

This is because with a maturity date of 30 January 2024, you will likely have the funds credited back into your CPF account in February 2024. 

This means that you will be missing out on your CPF OA interest from January 2023 to February 2024. 

Hence, while it is generally more worthwhile to use CPF OA funds to invest in longer maturity issuances, this might not be the case when comparing the upcoming 6-month and 1-year T-bill auctions. 

What would Beansprout do?

In summary, the decision on whether to buy the 6-month T-bill or 12-month T-bill depends largely on your expectations on inflation and interest rates. 

The 1-year T-bill auction offers an opportunity to lock in interest rates and remove reinvestment risks for 1 year if interest rates were to start declining sooner than expected. 

Truth be told, it’s hard to have a crystal ball on where interest rates are going to be six months later.

If you do not want to take a view on whether interest rates are heading higher or lower, then you can build a bond ladder or a diversified portfolio. 

We can also consider the opportunity cost in putting our money in the T-bill for 6 months or 1 year.

Here, we can compare the yields on the T-bill to fixed deposits, which are also relatively low risk ways to park our spare cash.

The best 6-month fixed deposit rate currently is at 3.95%, and the best 12-month fixed deposit rate currently is at 4.15% for minimum deposits of S$10,000.

OCBC is also offering a 12-month fixed deposit rate for CPF OA funds of 3.4%. 

These are alternatives that we would consider if we are not able to get our T-bill allotments in the upcoming auctions. 

If you're looking at the 10-year SGS bond, let us know in our Telegram group and we will share our thoughts on the upcoming issuance too.