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Will the T-bill yield fall below 4.0% p.a. in the upcoming auction on 24 Nov?

22 Nov 2022

Competitive bids put up by individual investors could be the wild card in the upcoming T-bill auction on 24 Nov.

T-bill auction 10 Nov

What happened?

We’ve been getting many questions from the Beansprout community on what is a good bidding strategy for the upcoming 6-month T-bill auction on 24 November (BS22123S).

After all, the cut-off yield on the 6-month T-bill fell to 4.0% p.a. in the last auction on 10 November, and many were not able to get their desired allocation through a non-competitive bid. 

We’ll take a few datapoints to see if they can provide some indication on what the cut-off yield in the upcoming auction could be. 

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Will the yield on the 6-month T-bill fall below 4.0% p.a?

#1 – Global bond yields

Since the last auction on 10 November, there have not been many significant changes to global interest rates. 

We saw an initial fall in bond yields after the US Consumer Price Index (CPI) data came in weaker than expected. However, bond yields have gone up again after Fed officials mentioned that it might be too early to pause on interest rate hikes. 

The US government 1-year bond yield is currently at 4.77%, relatively unchanged from its 4.78% level as of 8 November. 

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Source: Tradingview

#2 – 6 month T-bill yield at close to 4.0% p.a.

We can also look at the current yield of 6-month T-bills in the market. 

Based on data from the MAS, the yield on the 6-month T-bill BS22122Z maturing on 16 May 2023 is 4.00%. 

This is once again very similar to the yield on the 6-month T-bill on 8 November, which was at 3.98%. 

In the past, we’ve seen that the cut-off yield of the 6-month T-bill auction was higher than the market rate. 

However, with rising demand for T-bill, the gap between the cut-off yield and the market yield appears to have narrowed. 

For example, the cut-off yield of the T-bill of 4.00% in the previous auction on 10 November was not too different from the market yield of 3.98% at that point in time. 

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Source: MAS

#3 – Competitive bids are a wild card

This leaves us with one of the key remaining factors – which is how will individual investors put in competitive bids in the upcoming auction. 

Last week, we explained how the T-bill auction is conducted and our strategy for making competitive bids.

To recap,  MAS will allocate to non-competitive bids first but cap this at 40% of the total issuance. 

Thereafter, MAS will allocate to the lowest yielding competitive bids, until the whole issuance size is taken. This will set the cut-off yield for the auction. 

T-bill auction Singapore competitive

What this means is that how the competitive bids are made will determine the yield that everyone gets at the auction! 

There are two factors at play here:

  • How many individuals switch from making non-competitive bids to competitive bids
  • What is the yield that these individuals would bid for the T-bills

If there are many people starting to make competitive bids and putting in bids of 1.0%, there is a possibility (however remote) that the cut-off yield for the next T-bill auction could fall to 1.0%. 

This is likely be the key determining factor of the cut-off yield in the upcoming auction, as the global interest rate and market yield for the 6-month T-bill have remained stable. 

What would Beansprout do?

#1 – Decide whether to submit a competitive or non-competitive bid if you’re keen on the T-bill

If you’re submitting a non-competitive bid, you need to be aware that you’ll be getting the T-bill regardless of the yield. 

This means that if the cut-off yield on the T-bill falls to 3.5%, you will be receiving 3.5% p.a. return on the 6-month T-bill. 

Also, as we have seen from the last auction, the allocation for non-competitive bids has come down to below 50%. 

In this case, a competitive bid allows you to invest in the bond only if it yields above a certain level.

For example, if you put in a competitive bid at 4.0%, you will invest in the T-bill if the cut-off yield is 4.0% or above. 

This provides a form of safety net in case the cut-off yield of the T-bill falls dramatically. 

However, the downside of making a competitive bid is that you may not get allocated if your bid is above the cut-off yield.

For example, if you put in a competitive bid at 4.0% and the cut-off yield is 3.98%, then you will not get allocated any T-bills in this auction.

#2- Consider other instruments as interest rates go up

The good thing is that there are now more alternatives even if we do not get our target allocation in this auction. 

The interest rates for fixed deposits have moved up in the last few weeks, and are now getting close to the yield on the T-bill. 

For example, UOB is now offering a promotional interest rate of 3.55% for fixed deposits of 6, 10, and 12 month tenor. The interest rates go up to 3.85% for deposits of $50,000 to $999,999.

There’s a $1 million and above bracket, but probably not applicable for most of us!

CIMB is offering a promotional interest rate of 3.75% for a fixed deposit of 12 months. 

Hong Leong Finance is offering a promotional interest rate of 3.80% for a fixed deposit of at least S$50,000 over 11 months. 

If we are looking for a product with a longer maturity and are willing to take some risk, the United Fixed Maturity Bond Fund 1 offers an indicative return of up to 4.95% per annum. 

#3 – Learn how to bid for the T-bill like a pro

If you’ve still got your mind set on the T-bill, we share various tips on bidding for the T-bill, including submitting numerous bids and building a bond ladder. 

To find out how to apply for the T-bill, read our ultimate guide to T-bills here. 

If you’ve a burning question, ask one of the shifus in our Telegram group

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