Some investors were disappointed that the cut-off yield on the latest T-bill auction on 18 January 2023 fell further to 4.0% p.a.
Apart from the lower cut-off yield, what surprised us the most was the very sharp fall in average yield for the latest auction.
Let’s take a further look at the auction results to see what might be the reasons driving the decline, and if there might be any implications for the upcoming T-bill auctions.
What we learnt from the latest T-bill auction
#1 – Demand for T-bill rises again
Demand for T-bills has picked up in January, after the seasonal decline in December.
The total amount of applications for the latest T-bill rose to S$13.1 billion from S$12.0 billion in the previous auction on 5th January.
This would mark the second highest amount of T-bill applications after the recent record on 10 November, when the results were delayed with more than 95,000 applications submitted.
#2 – Non-competitive bids receive full allocation
Despite the general increase in interest in T-bills, the amount of non-competitive bids for T-bills has stayed constant at S$1.4 billion.
As the amount of non-competitive bids is below the allocation limit of $2 billion, all non-competitive bids were able to get full allocation for the T-bills this time.
What this means is that most of the incremental demand for T-bills went to competitive bids.
Quite clearly, more investors are now preferring competitive bids over non-competitive bids.
|5 Jan 2023||18 Jan 2023|
|Total T-bill auction (S$bn)||4.7||5.0|
|Total bids (S$bn)||12.0||13.1|
|Non-competitive bids (S$bn)||1.4||1.4|
|Competitive bids (S$bn)||10.6||11.7|
|Competitive bids allotted (S$bn)||3.3||3.6|
|Competitive bids not allotted (S$bn)||7.3||8.1|
#3 – Average yield of bids fell sharply
Here comes the most interesting bit about this T-bill auction.
While the cut-off yield saw a moderate decline from 4.2% to 4.0%, there was a very significant drop in the average yield from 3.77% to 2.71%.
Let’s try to understand this a bit better.
When reporting the auction results, MAS also shares a few key statistics.
As many might be familiar by now, the cut-off yield is the yield where the T-bill is issued. All competitive bids below the cut-off yield will be fully allotted the T-bill.
Apart from the amount of bids that are made, the yields that investors are putting in for their competitive bids will also determine the cut-off yield.
Earlier, we have seen that there has been an increase in demand for the T-bills in the latest auction.
But what is also worth noting is that there were also a sizeable amount of bids that were made at much lower yields.
This is where an analysis of the median and average yields become useful.
We were not able to find a definition of the median and average yields on the MAS website, but we were able to get a definition from the US government website, and assume that the MAS uses a similar definition.
The median yield is the middle of all the competitive bids that were allotted the T-bill. In other words, 50% of the amount of accepted competitive bids is below the median rate.
In the latest auction, there were S$3.6 billion worth of competitive bids allotted.
With a median yield of 3.9%, it would mean that there were S$1.8 billion of bids below 3.9%, and S$1.8billion of bids between 3.9% and 4.0% (the cut-off yield).
The average yield is the weighted average yield of all successful bids. It is calculated as sum of all the yields submitted by successful bids, divided by the amount of successful bids.
What’s important to note is that if there are bids made at extreme level of yields, they would affect the eventual average yield.
From the calculation earlier of the median yield, we can estimate that there were around S$1.8 billion of competitive bids between 3.9% to 4.0%.
If the average yield of the S$3.6 billion of competitive bids allotted was at 2.71%, and half of these ($1.8b billion) was at an estimated average yield of 3.95%, the calculation would mean that the other S$1.8 billion of allotted competitive bids would be at an average yield of about 1.5%!
What would Beansprout do?
From the analysis above, we can see that the results of the T-bill auction can be unpredictable and subject to fluctuation depending on how other investors may choose to make their competitive bids.
These are all relatively safe options to consider if we are not allotted the T-bill.
If you think that this article might be of help to your friends bidding for the T-bill, do share it with them! The next 1-year T-bill auction will be coming up on 26 January.
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