Will the T-bill yield fall with lower fixed deposit rates?

What happened?

Many investors have asked what we think the cut-off yield for the upcoming 6-month T-bill auction (BS23109E) on 11 May would be.

It seems like there are more investors looking at the 6-month T-bill after the cut-off yield in the previous auction rebounded to 3.83% p.a. in the previous auction. 

However, many others are concerned that the decline in fixed deposit rates would bring down the T-bill yield. 

Let us take a look at what the current indicators are telling us about whether it might be worthwhile to apply for the upcoming 6-month T-bill.

Will the T-bill yield fall with lower fixed deposit rates?

US bond yields have been volatile

US bond yields have been on a roller-coaster ride following the collapse of Silicon Valley Bank. 

On one hand, rising strain in the banking system has led to concerns about a potential recession. 

This led to a fall in government bond yields as investors expect that the Fed would have to cut its rates soon.

On the other hand, strong economic data particularly employment data led some investors to believe that inflation would remain persistent.

Looking at the US 1-year government bond yield, it fell from 4.9% in early May to a low of about 4.6%, before rebounding to 4.8% now. 

Singapore 6-month T-bill yield has fallen slightly

The Singapore government bond yield has been relatively stable compared to the US government bond yield.

We’ve seen the closing yield on the 6-month government bond falling slightly from 3.77% p.a. on 28 April to 3.73% p.a. on 8 May. 

It would seem like the Singapore government bond yield has been impacted more by expectations for the Fed the pause its aggressive rate hike cycle. 

Demand could be higher with online CPF applications via UOB 

In the previous auction on 26^th April, there was a sharp decline in the amount of T-bill applications.

The total amount of applications fell to S$11.1 billion from S$12.3 billion in the previous auction. This could be due to a fall in applications amongst CPF account holders, due to the loss of additional CPF interest for applications using CPF funds in the auction. 

One wild card that could affect demand for T-bills in this auction is UOB allowing its customers to apply for T-bills online using CPF OA funds.

Earlier, we saw that when OCBC offered its customers the ability to apply for T-bill using CPF-OA via internet banking, there was an increase in the amount of applications.   

However, it remains to be seen if there will be more UOB customers who will make use of this new function to apply for T-bills online using their CPF funds. 

What would Beansprout do?

The closing yield on the 6-month T-bill has fallen slightly to 3.73% p.a. on 8 May 2023 on rising expectations of a pause in the Fed rate hike.

In addition, we could see more demand compared to the previous auction with UOB offering its customers the ability to apply for the T-bill online using CPF funds. 

One way to make sure we do not end up buying the T-bill at a lower than expected bond yield is to consider putting in a competitive bid in the auction.

For cash applications, we can refer to the latest fixed deposit rates to determine the yield to bid for the T-bill. The best 6-month fixed deposit we could find offers an interest rate of 3.6% p.a. Amongst local banks, the best 6-month fixed deposit rate is lower at 3.45% p.a.

For CPF applications, we can calculate how much more interest we can potentially earn by investing our CPF funds into the T-bill at different interest rates using our T-bill calculator. 

The auction will be held on 11 May (Thur), which means that we would need to put in our cash applications by 10 May (Wed). 

The closing date for T-bill applications using CPF-OA differs across the three local banks now offering the function.

• Applications for T-bills online using CPF OA via DBS close at 12 noon on 9 May. Read our step-by-step guide to applying via DBS. 
• Application for T-bills online using CPF OA via OCBC close at 9pm on 10 May. Read our step-by-step guide to applying via OCBC
• Applications for T-bills online using CPF OA via UOB close at 9pm on 9 May. Read our step-by-step guide to applying via UOB. 

Join our telegram group to get the latest updates on Singapore bonds, stocks, REITs and ETFs.

[Promo] Earn a S$20 Grab voucher and up to US$500 welcome rewards when you open a Webull account through Beansprout. Learn more about the promo.