T-bill yield jumps to 4.4% p.a.! Why is the bond yield surprisingly high?

What happened?

The market always like to throw us surprises. 

Just when many investors thought that they would never see the yield on the 6-month T-bill return to above 4%, it reached 4.4% p.a. in the latest auction on 8 December. 

This eye-popping yield on the 6-month T-bill is even above its recent peak of 4.19% p.a.

We decided to take a closer look into what is driving the bond yields higher.  

What we learnt from the latest T-bill auction

#1 – Demand for T-bills falls further

Quite clearly, there were less investors who were interested in the T-bills this time.

The total amount of subscriptions fell to S$9.3 billion from $11.9 billion in the previous auction.

This is way lower than the S$14.2 billion of subscriptions on 10 November. 

It’s also interesting to note that this would be the second lowest level of subscriptions in recent months! 

There could be various reasons for the fall in demand. 

Some investors might have been disappointed by the lower interest rates in recent auctions, and turned to other instruments like fixed deposits. 

Or it could just be that more Singaporeans are busy watching the World Cup or away for year-end holidays! 

#2 – Non-competitive bids receive full allocation

Investors who put in non-competitive bids are probably quite happy that they are able to receive full allocation once again. 

There were only $1.2 billion of non-competitive bids submitted this time, below the $1.8 billion of maximum allocation for non-competitive bids. 

Once again, the S$1.2 billion of non-competitive bids is significantly below the $3.6 billion of non-competitive bids we saw on 10 November. 

Apart from the general fall in demand in T-bills, some investors might also have been more wary about putting in non-competitive bids so as not to subscribe to the T-bill should the yield fall further. 

#3 – Competitive bids are moving higher

What was probably most surprising is probably the increase in cut-off yield to 4.4% p.a. from 3.9% p.a.

This is especially so given global interest rates have remained relatively flat compared to the previous auction, and the current market yield for the 6-month T-bill is still at around 4.0% p.a.

As we shared earlier, the cut-off yield for the T-bill auction is determined by the competitive bids that are made. 

Apart from the amount of bids that are made, the yields that investors are putting in their competitive bids will also determine the cut-off yield. 

If investors are making competitive bids at higher yields, then the cut-off yield for the T-bill would potentially be higher. 

The average yield for competitive bids was at 3.73% p.a. at this auction. This is significantly higher than the average yield of 3.26% p.a. in the previous auction. 

The median yield of 3.85% p.a. this auction is also higher than the median yield of the previous auction. 

This means that not only are there less investors bidding for the T-bill, investors who are applying for the T-bill are also demanding a higher yield. 

What would Beansprout do?

Following the announcement of the T-bill auction result, some in the Beansprout community suggested that banks will probably have to raise the interest rates on fixed deposit account to match the T-bill once again. 

We’ve already seen banks raising the fixed deposit rate offered in recent months, such that it was possible to get a higher interest rate on fixed deposits than the T-bill (until the auction today). 

For example, CIMB is offering a 3.95% interest rate for 6-month fixed deposit with a minimum deposit of S$10,000. 

Do check out our Telegram group as the community has been really helpful in sharing which bank is offering the most attractive interest rate. 

We’ll also be looking out closely for the upcoming Federal Reserve meeting on 14 December to find out what the interest rate direction would be going into 2023. 

If you missed out on the recent auction and are interested in the T-bill as a way to park your spare cash, the next 6-month T-bill auction will be on 21 December 2022.