6-month T-bill interest rate rising above 4%? Here’s what the charts are showing us.

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Bonds

By Beansprout • 22 Oct 2022 • 0 min read

The cut-off yield on the 6-month T-bill surged to 3.77% per annum in the last auction on 13 October. As bond yields continue to rise, could the yield rise to above 4% in the upcoming auction?

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TL;DR

  • Global bond yields have risen since the last Singapore 6-month T-bill auction on 13 October 2022. The US government 1-year bond yield has risen by 0.33 percentage point (0.33%) between 12 and 21 October.
  • Over the same period, the market yield on the benchmark Singapore 6-month T-bill rose by 0.33%. If the cut-off yield on the 6-month T-bill auction stays above the market yield like in recent auctions, there is a likelihood that the cut-off yield in the upcoming auction on 27 October could rise above 4%. 
  • The cut-off yield on the 12-week MAS note in the auction on 18 October was at 4.25%. 
  • The eventual cut-off yield for the 6-month T-bill auction will depend on market demand and supply, while global bond yields remain volatile. Investors who would like to smooth out interest rate fluctuations can consider building a bond ladder. 

What happened?

The question we’ve been getting a lot from the Beansprout community recently is – what will be the interest rate on the 6-month Singapore T-bill (BS22121F) to be auctioned on 27 October 2022? 

After all, one of the drawbacks of the T-bill is that we will not know the interest rate at the point of application.

This has deterred many investors from applying for the T-bills, as they’d prefer the certainty of knowing the interest rates that comes with investing in Singapore Savings Bond or putting money into fixed deposit.

Hence, we will take a look at a few datapoints to see if we can pick up some indication of what the yield on the upcoming 6-month T-bill would be. 

Table

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Source: MAS

Will the cut-off yield on the 6-month T-bill rise above 4% in the upcoming auction?

To answer the question, we look at the following datapoints:

  • Global bond yields
  • Current market yields of 6-month T-bills
  • Recent auction of 12-week MAS notes

#1 – Global bond yields have spiked up significant in the past week

If you’ve been following financial news over the past two weeks, you’d have noticed that global bond yields have been climbing steadily.

This came after persistent inflation led to expectations that Central Banks will continue to be aggressive in raising interest rates. 

In the US, consumer prices rose by 8.2% in September, while the Monetary Authority of Singapore (MAS) has warned that price increases could be persistent for the remaining of 2022 and into next year. 

The US government 10-year bond yield has surged above 4% to reached 4.22% as of 21 October. 

Likewise, the US government 1-year bond yield has risen by 0.33 percentage point (0.33%) to 4.59% as of 21 October, from 4.26% on 12 October. 

Chart

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Source: Tradingview

#2 – 6-month T-bill now trading at a yield of above 3.6%

We can also look at the current yield of 6-month T-bills in the market. 

Based on data from the MAS, the yield on the 6-month T-bill BS2212OE maturating on 18 April 2023 is 3.66% as of 21 October 2022. 

This is about 0.33 percentage points (0.33%) higher than where it was on 12 October. 

That’s similar to how much the yield on the US government 1 year bond yield has gone up by between 12 October and 21 October! 

One thing we’ve noticed is that the cut-off yield on the T-bill auctions is typically higher than the market yield at the time of the auction.

For example, in the auction on 13 October, the cut-off yield on the 6-month T-bill was at 3.77%. This was higher than the closing yield on 12 October of 3.33%, and closing yield on 13 October of 3.59%. 

If this trend were to continue, then the cut-off yield of the upcoming T-bill auction could be above the closing yield of 3.66% on 21 October. 

If the cut-off yield on the 6-month T-bill auction were to go up as much as what benchmark yield on the 6-month T-bill has gone up by between 12 October and 21 October, then the cut-off yield in the upcoming 6-month T-bill could rise above 4%! 

Table

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Source: MAS

#3 – Recent auction for MAS 3-month note was at 4.25% cut-off yield

The other thing we can check is the latest auction results on the MAS 3-month note.  

In case you’ve not heard of the 3-month note, that’s because it is not available to retail investors. Only institutional investors can participate in the auction on the 3-month note currently. 

The latest cut-off yield on the MAS 3-month note on 18 October was at 4.25%, above the cut-off yield of 3.8% just a week ago on 11 October. 

Table

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Source: MAS

What would Beansprout do?

If the cut-off yield of the 6-month T-bill were to really go up above 4% in the upcoming auction, then it would make the T-bill even more attractive to us. 

In our simulated portfolio, we noted our preference for shorter maturity government bonds to reduce the interest rate risk if we need to redeem the bonds before they mature.  

However, there is no certainty on the interest rates prior to the auction, as the eventual cut-off yield will still depend on the demand and supply of T-bills in each auction.

We have seen growing interest by retail investors in the T-bill, while global bond yields continue to be volatile. 

For example, US bond yields fell on 21 October following news reports that the Federal Reserve may consider less aggressive interest rate hikes after November. 

If you still do not like the uncertainty of not knowing the interest rate on the T-bill auction in advance, one potential strategy is to build a T-bill ladder to reduce your exposure fluctuating interest rates.

To find out more about the T-bill, including how to apply for the T-bill using cash or CPF, do check out our FAQ on T-bills. You can also ask us your burning question on T-bills in our Telegram group.  

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