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1-year T-bill yield of 3.87% below best fixed deposit rate. Where to put your spare cash now?

26 Jan 2023

The cut-off yield for the latest 1-year Singapore T-bill auction was at 3.87% p.a., below the closing yield on 25 January and the best fixed deposit interest rate.

What happened?

The 1-year T-bill (BY23100X) auction on 26 January 2023 has been widely anticipated by investors, because it is not often that we see an auction for the 1-year T-bill.

However, some were disappointed when the cut-off yield for the auction turned out to be 3.87% p.a.

Earlier, we have seen the same result for the 6-month T-bill auction on 18 January, when there were a significant number of bids made at a very low yield. 

Let’s dig deeper to find out if we can find out what is driving the lower yield, and what we can do if we are unable to get the 1-year T-bill this time. 

Table

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Source: MAS

What we learnt from the latest 1-year T-bill auction

#1 – Higher demand for 1-year bill

There were more subscriptions for the 1-year T-bill in this auction compared to the previous auction in October 2022. 

The total amount applied rose to S$10.5 billion, compared to S$8.6 billion the last auction. 

However, this is still below the amount of applications for the 6-month T-bill, which was at S$13.1 billion in the auction on 18 January.

It would seem like investors have a preference for shorter maturity bonds for liquidity purposes. 

 

Table

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Source: MAS

#2 – Clear preference for competitive bids

Non-competitive bids for the 1-year T-bill were able to get full allocation, as there were only $644 million of non-competitive bids for the $3.6 billion issuance. 

This is a similar trend that we have seen for the 6-month T-bill auction, where investors have shifted towards a preference for competitive bids to ensure that they are able to get a minimum yield for their investment. 

#3 – Cut-off yield below market yield

It is interesting to note that the cut-off yield for the latest 1-year T-bill auction of 3.87% is lower than the market closing yield of 4.07% on 25 Jan. 

As some in the Beansprout community commented, this is likely due to investors applying using their CPF funds, and hence requiring a lower yield. 

After all, the CPF OA pays an interest rate of 2.5% p.a., and OCBC 1-year fixed deposit rate for CPF funds is only at 3.4% p.a. 

Hence, the 1-year T-bill at an interest rate of 3.87% p.a. might still appear more attractive to investors compared to these alternatives, even after taking into consideration the additional months of CPF interest lost. 

Table

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Source: MAS

What would Beansprout do?

The yield on Singapore government bonds has come down in recent weeks as inflation continue to show signs of easing.

The market yield on the 1-year T-bill has declined from above 4.2% in early January to be just above 4.0% now. 

The cut-off yield for the 1-year T-bill auction could also be further pulled down by CPF funds used to apply for the T-bill. 

Chart, line chart

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Source: TradingView

 

Some in the Beansprout community then asked if this will mean that banks will start cutting their fixed deposit rates too. 

For now, the best fixed deposit rates are still offering a higher interest rate compared to the latest 1-year T-bill auction.

For example, the best 1-year fixed deposit rate is at 4.15% p.a. for deposits of at least S$10,000. 

If you can’t decide between locking up your spare cash for 6 months or 12 months, there’s an option to earn up to 4.08% p.a. over a tenure of 8 months. 

With the recent fall in government bond yields, we would not be surprised if some of the banks start to cut their fixed deposit rates too. 

With interest rates coming down, it might be worthwhile to take a look at Singapore REITs too.

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