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Earn a potentially higher interest rate on your CPF OA by buying the T-bill. Is it worthwhile?

25 Sep 2022

With interest rates rising, should you invest in the SGS bond and T-bill using your CPF to earn a higher return?

Buy T-bill with CPF OA

TL:DR

  • If your total CPF balance is below S$60,000, then you will not be able to make investments using your CPF Ordinary Account. In any case, you will be able to earn an extra interest of 1% per annum on the first $60,000 of your combined CPF balances.
  • If you have more than $20,000 in your CPF Ordinary Account (OA) and $40,000 in your Special Account (SA), then it might be worth considering investing in the SGS Bond or T-bill if they offer a higher interest rate.
  • However, you will lose at least one additional month of CPF interest payment when you use your CPF to invest in the T-bill or SGS Bond. As such, it is generally more worthwhile to use your CPF OA to invest in the T-bill or SGS Bond when the bond has a longer maturity or when interest rates are higher. 
  • There are also risks relating to investing in the T-bill and SGS Bond, and the price of the bond could fall if interest rates go up. There is also no certainty on the interest rate of the T-bill or SGS bond at the point of application.  

What happened?

After our recent article explaining why your CPF interest rate has not gone up even with soaring interest rates, we received several questions on Telegram from the Beansprout community on whether we would put invest in the Singapore Government Securities Bond (SGS Bond) and Treasury Bill (T-bill) using our CPF balances. 

After all, if the CPF Ordinary Account interest rate is staying at 2.5% for now, we might be able to make a better return by investing in a SGS Bond or T-bill that offers a higher interest rate.

This question has come up often after the yield on the 6-month T-bill reached 3.32% in the latest auction. 

Hence, we decided to do some analysis to look at whether we should invest in the T-bill or SGS Bond using our CPF. 

Singapore 6-month T-bill interest rate
Source: Tradingview

Should you buy the T-bill or SGS Bond with CPF?

#1 - If your CPF balance is below S$60,000

If your total CPF balance is below S$60,000, then you will not be able to make investments using your CPF OA 

This is because you will have to set aside $20,000 in your Ordinary Account and $40,000 in your Special Account respectively before the excess savings can be used for investments. 

In any case, all CPF members are earning an extra interest of 1% per annum on the first $60,000 of your combined CPF balances. This is capped at $20,000 for OA. 

This means that you are earning an interest rate of 3.5% per annum on your CPF OA account for the first S$20,000 of savings, and 5% per annum on your Special, Medical and Retirement accounts up to a total combined CPF balance of S$60,000.

With the yield on the Singapore Treasury Bill still below 3.5% currently, you would be earning a higher interest rate by leaving it in your CPF account. 

CPF Interest Rate September 2022

#2 – If your total CPF balance is above S$60,000

Here’s what you need to know before you rush to your bank to invest in the T-bill using your CPF-OA: You will lose at least one additional month of CPF interest payment for using your CPF to invest in the T-bill or SGS Bond, on top of the time period it takes for the bond to mature. 

CPF OA Interest rate compute
Source: CPF

The CPF balances used for interest computation are affected by the transactions in your account. Withdrawals/deductions in this month will not earn interest from this month onwards. Contributions (including refunds) received this month start earning interest next month. 

What this means is that the CPF interest payment is computed based on the lowest balance for the month, rather than the average balance of the month.  

For example, if the T-bill auction date is on 13 October 2022, you will receive your money back in April 2023. 

This means that you will not be receiving your CPF interest rate of 2.5% for 7 months from October 2022 to April 2023. 

There are instances where you might lose more than one additional month of CPF interest which we will discuss later.  For simplicity purposes, we will use the instance of losing one additional month of CPF interest in the illustrative examples below. 

Illustrative example 1 - Investing S$100,000 in the 6-month T-bill at 3.32% per annum using our CPF OA

If we invest S$100,000 of our CPF OA into the T-bill, we will lose out on approximately S$208 of interest payment for at least one additional month that we invest in the T-bill.  This is based on the current CPF OA interest rate of 2.5%. 

Based on the 6-month Singapore Treasury Bill interest rate of 3.32% at the last auction of 15 September 2022, we will receive an interest payment of S$1,650 for holding on to the T-bill for 6 months.

If we had kept the money in your CPF ordinary account instead, we would have received an interest payment of S$1,250 for the six months that we are earning the CPF interest rate of 2.5%. 

That would work out to be a difference of S$400.

However, recall that we will lose an interest payment of S$208 for the month that we invested in the T-bill. 

There are also some other charges involved. For CPF-OA investments, the agent bank charge for buy is typically $2.50* + GST per transaction. The bank may also charge a fee of S$2 per counter per quarter.

Subtracting the difference, we could potentially earn an additional S$185 for putting S$100,000 of our CPF OA savings in the 6-month T-bill that pays an interest rate of 3.32% per annum.

Taking the CPF interest calculation into consideration, using our CPF OA to invest in the T-bill or SGS Bond is generally more worthwhile for longer maturities or with higher interest rates

Illustrative example 2 - Investing S$100,000 in the 1-year T-bill at 3.32% per annum using our CPF OA

Firstly, the potential gains could be more significant when we invest in a T-bill with longer maturity compared to one with shorter maturity, assuming the interest rates per annum are the same.

Going back to our previous example, if the 1-year Singapore Treasury bill interest rate is also at 3.32%, we will receive an interest payment of S$3,320 for investing S$100,000 into the T-bill for 12 months.

If we had kept the money in your CPF ordinary account instead, we would have received an interest payment of S$2,500 for the 12 months that our S$100,000 of balances is earning the CPF interest rate of 2.5%. 

We will still lose an interest payment of S$208 for the month that we withdrew our money to make the investment. 

Subtracting this difference in CPF interest payment and related fees, we could potentially earn an additional S$600 for putting S$100,000 of our CPF OA savings in a 1-year T-bill that pays an interest rate of 3.32% per annum.

That’s more than double the S$185 we’d earn for putting it into a 6-month T-bill that pays the same annual interest rate. 

Illustrative example 3 - Investing S$100,000 in the 6-month T-bill at 4.00% per annum using our CPF OA

Secondly, the potential gains would be more significant if the yield on the T-Bill continues to increase.

If the interest rate on the 6-month T-bill increases to 4.0% per annum, we will receive an interest payment of about S$2,000 for holding on to the T-bill for 6 months.

If we had kept the money in your CPF ordinary account instead, we would have received an interest payment of S$1,250 for the six months that you are earning the CPF interest rate of 2.5%. 

Subtracting the interest payment of S$208 we are missing out on and related fees, we could potentially earn approximately S$530 more for putting S$100,000 of our CPF OA savings in the 6-month T-bill that pays an interest rate of 4.0% per annum.

How to minimise losing your CPF interest 

As our Beansprout community helped to point out, there can be auctions where you might lose two additional months of CPF interest rather than one additional month. 

For example, if you subscribed to the 6-month T-bill auction on 29 September, the T-bills will only be issued to you in October 2022. The maturity of the bonds will be in April 2023. 

Depending on when the deduction is done from your CPF account, you might lose 8 months of CPF interest by investing in this issuance from September 2022 to April 2023. 

This represents an additional loss of CPF interest of 2 months compared to the 6-month maturity of the T-bill. 

T bill auction date
Source: MAS

However, if you had subscribed to the 6-month T-bill auction on 15 September, the T-bills will be issued on 20 September and the bonds will mature on 21 March 2023. 

This means that you will lose 7 months of CPF interest by investing in this issuance from September 2022 to March 2023. 

This represents an additional loss of CPF interest of 1 month compared to the 6-month maturity of the T-bill. 

Pro tip: One of the things to consider when deciding which auction to participate in could be based on whether you will lose one additional month of CPF

T-bill auction date
Source: MAS

What would Beansprout do?

From the calculations above, it is generally more worthwhile to invest in the T-bill using our CPF-OA for longer maturities issuances. This is because of the loss of at least one additional month of CPF interest payments when we perform the transaction of purchasing the T-Bill.

As such, the potential absolute gains could be higher when purchasing the 12-month Treasury bill compared to the 6-month Treasury bill, assuming the annual interest rates are the same. 

However, there are always risks when investing, and we would like to point out a few potential risks to such a strategy.  

Firstly, investing in T-bills carries interest rate risks. You could lose some of your capital should you sell your T-bill before it matures, as the price of the T-bill could fall when interest rates go up. 

Hence, you’d need to plan to make sure that you will not need the funds in your CPF OA for other purposes for your balances are invested in the T-bill.

For example, if you are using your CPF OA for your mortgage repayments, do you have sufficient buffer to repay your housing loans if interest rates continue to go up?

The other risk is that there is no certainty that the interest rate on the longer maturity T-bill will be similar or higher than the shorter maturity T-bill. 

As we have seen in recent months, the yield on longer maturity bonds could be lower than the yield on shorter maturity bonds. This is what economists refer to an ‘inverted yield curve’.  

Also, interest rates remain very volatile with the uncertain economic environment, so there is no certainty you will be able to get a similarly high interest rate as with previous T-bill auctions.

For those who are interested in investing in the Treasury Bill with your CPF ordinary account balance, it might be useful to note that there is an upcoming auction for the 1-year Singapore T-bill on 13 October 2022. 

Join our telegram group if you have any questions about using your CPF to invest in the T-bill or SGS Bond. 

IssuanceAuction Date
6-month T-bill29 September 2022
6-month T-bill13 October 2022
1-year T-bill13 October 2022

How to apply for T-bill using CPF?

You will need to submit an application in person at any branch of the CPF Investment Scheme (CPFIS) bond dealers (DBS/POSB, OCBC, or UOB).

For CPFIS-OA investments, you will need a CPF Investment Account with one of the three CPFIS agent banks (DBS/POSB, OCBC, and UOB). There is no need to open any CPF Investment Account if you wish to invest CPFIS-SA funds.

Applications through ATMs and internet banking may close 1 to 2 business days before the auction, as your bank will need to process the application before the auction closes. Do check with your bank for the exact cut-off time for the different application channels.

The minimum bid amount for SGS bonds and T-bills is S$1,000. So you need to start by deciding how much you want to invest, in multiples of S$1,000.

For new SGS/T-bill issues, the full bid amount will be deducted from your account at the point of application. So do make sure you have sufficient funds in the account you are using to apply. 

If your bid is unsuccessful, the money will be refunded into the account used to make the application. The refund will be shown in your account 1-2 business days after the auction day.

Note on 1 October 2022: This article has been edited to provide additional clarity on loss of CPF interest rates based on the T-bill auction dates. 

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