Will the T-bill yield rise after the Fed rate hike?

What happened?

Some investors were disappointed after the cut-off yield on the 6-month Singapore T-bill fell to 3.85% in the previous auction on 20^th July 2023. 

Hence, many were wondering if we will see a bounce in the cut-off yield for the upcoming 6-month Singapore T-bill auction (BS23115E) on 3 August 2023.

This is especially so after the US Federal Reserve raised its benchmark interest rate by another 0.25% to the highest level in more than 22 years. 

Let us look at the latest indicators to find out whether it might be worthwhile applying for the upcoming 6-month Singapore T-bill. 

Will the T-bill yield rise following the Fed rate hike?

#1 – US government bond yields rose after the Fed rate hike

Earlier this week, the US Federal Reserve raised interest rates by 0.25% as expected, bringing the Fed’s benchmark rate to 5.25-5.5%. 

Fed Chairman Jerome Powell left open the possibility of further hikes, but emphasised that it will depend on incoming data in the coming months.

Following the interest rate hikes by the US Federal Reserve, we saw a slight bounce in the US government bond yields. 

In particular, we have seen the yield on the US 1-year government bond rising to about 5.4% as of 28^th July from about 5.3% just a week ago. 

US government bond yields rose further after the Bank of Japan announced that it will allow greater flexibility on its monetary policy, causing Japan’s benchmark bond yield to soar to a nine-year high. 

#2 – Singapore government bond yields have gone up in tandem

Singapore government bond yields have gone up in recent days with the rise in US and Japanese government bond yields.

The closing yield on the 6-month Singapore T-bill was at 3.87% as at 28 July 2023, slightly above the yield of 3.85% on 21 July. 

Likewise, the cut-off yield on the latest 1-year T-bill auction on 27^th July was at 3.74%, above the closing yield of 3.65% on 21 July. 

#3 – Smaller issuance size compared to previous auction

In the previous auction on 20^th July, we saw that the larger T-bill issuance size of S$5.6 billion supported the cut-off yield even as there were significantly more applications submitted.

The issuance size in the upcoming auction on 3^rd August has been reduced slightly to S$5.5 billion. 

This would mean that if the amount of non-competitive bids were to rise slightly from the S$2.2 billion of applications in the previous auction, investors who put in non-competitive bids may not be able to get their full allocations of the T-bill once again. 

This is because non-competitive bids will only receive pro-rata allotment of T-bills if non-competitive applications exceed 40% of amount offered.

What would Beansprout do?

Singapore government bond yields have risen slightly in recent days following the Fed rate hike. 

The closing yield on the 6-month Singapore T-bill was at 3.87% on 28^th July, slightly above the cut-off yield on the previous auction of 3.85%. 

This is significantly higher than the best 6-month fixed deposit interest rate of 3.5% offered by HL Bank. 

It is also above the promotional interest rate of 3.5% p.a. for new customers of the CIMB FastSaver Account, and the interest rate of 3.48% p.a. offered by the GXS Savings Account. 

With the slightly lower issuance size in the upcoming T-bill auction, it might be worth noting that non-competitive bids may not receive full allocation if the amount of non-competitive applications increase compared to the previous auction. 

If you have been making non-competitive bids, it might be worthwhile considering a competitive bid, where you can specify the yield you are willing to accept and will only invest in the T-bill if the cut-off yield is above this level. 

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 3 Aug (Thur), which means that we would need to put in our cash applications by 9pm on 2 Aug (Wed).

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

• Applications for T-bills online using CPF OA via DBS close at 12 noon on 1 August. Read our step-by-step guide to applying via DBS. 
• Application for T-bills online using CPF OA via OCBC close at 9pm on 2 August. Read our step-by-step guide to applying via OCBC
• Applications for T-bills online using CPF OA via UOB close at 9pm on 1 August. Read our step-by-step guide to applying via UOB. 

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