Will Credit Suisse’s fall drive down the T-bill yield in the 30 March auction?

What happened?

We've seen how the collapse of Silicon Valley Bank led to a flight to safety and a lower 6-month T-bill yield of 3.65% in the auction on 16 March. 

The financial turmoil eventually spread to European banks, driving the takeover of Credit Suisse by rival Swiss bank UBS. 

The share prices of global financial stocks have remained volatile in the last few weeks, as investors weigh the likelihood of a broadening contagion versus any potential government support. 

This has also led to significant volatility in US government bond yields, as investors evaluate the outlook for the global economy.

Let us take a look as to whether this might mean for bond yields in the upcoming 6-month T-bill auction (BS23106N) on 30 March 2023. 

Will Credit Suisse's fall drive down the T-bill yield in the auction on 30 March?

#1 – US government bond yields have been very volatile

There have been many questions in the Beansprout telegram community about where are government bond yields headed.

The short answer is – It depends on which day you’re updating the chart. 

Following the plunge in government bond yields with the collapse of Silicon Valley Bank, US government bonds have been very volatile. 

The yield on the 2-year government bond has fluctuated between 3.60% and 4.40% in the past two weeks. 

In fact, there were periods when the bond yields fluctuated by as much as 0.40% within a few days. 

The 6-month government bond yield has also been very volatile, ranging from 4.60% to 5.10% in the last two weeks. 

Looking at the bond yields over the past 6 months, such volatility is very rare and clearly reflects significant uncertainty in the global economy. 

#2 – Singapore 6-month government bond yield relatively stable at about 3.7%

Compared to US government bonds, the 6-month Singapore government bond yield has been relatively stable at about 3.7% over the past week. 

However, there has been more volatility in the 10-year Singapore government bond yield. 

As seen in the table below, the 10-year government bond yield rose from 2.83% on 20 March to 2.93% on 21 March, before falling back to 2.83% on 23 March.

Once again, such volatility in the 10-year government bond yield within a few days is not something that is commonly seen. 

Likewise, the cut-off yield on the 12-week MAS note has seen a sharp drop from 3.95% on 7 March to 3.83% on 14 March, before bouncing back to 4.04% on 21 March 2023. 

#3 – Less alternative options to consider 

Earlier, we explained how the T-bill auction is conducted and how the cut-off yield is determined by the competitive bids submitted.

To summarise, the cut-off yield at each auction depends on

• The amount of bids that are made
• The yields that investors are putting in their competitive bids

Generally, it is quite hard to predict the competitive bids that will be put in each time.

For example, we saw the total amount of applications for T-bills declining to S$12.7 billion in the 16 March auction from $13.0 billion in the 2 March auction.

It would appear that the end of the OCBC promotion offering 8-month fixed deposit at a rate of 3.88% p.a. for CPF funds did not lead to a significant increase in demand for T-bills.

However, the cut-off yield fell to 3.65% p.a. from 3.98% p.a. as investors put in lower bids in the auction on 16 March. 

What would Beansprout do?

The collapse of Silicon Valley Bank and takeover of Credit Suisse has led to a lot of uncertainty in the global financial markets.

This has translated to significant volatility in US government bond yields, and to a lesser extent Singapore government bond yields.

While the 6-month Singapore government bond yield has stayed at about 3.7% in the past few days, it is hard to predict what the cut-off yield will be in the upcoming auction on 30th March. 

There will be many factors to keep a look out for, including whether the current stress in the financial sector spreads to more banks. 

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.  

We can also choose to refer to the latest fixed deposit rates to determine the yield to bid for the T-bill. 

In our latest update on 23 March, we were still able to find a few fixed deposit accounts that offered an interest rate of close to 4.0% over a 6-month and 12-month period, even as some banks such as HSBC have cut their fixed deposit rates in recent weeks. 

The auction will be held on 30 March (Thur), which means that we would need to put in our cash applications by 29 March (Wed). 

Applications for T-bill using CPF close earlier, with online applications using CPF-OA ending at noon on 28 March (Tue).

If you’re applying for the T-bill using your CPF OA funds, we share how you can apply for T-Bills using CPF OA via DBS i-banking.  

💰 Last Call!

Open a Webull brokerage account by 31st March and receive a welcome gift of US$50 to US$500. Read our guide on how to do so in 3 steps:

1) Sign up here.

2) Deposit any amount (even S$1!). You get US$30 to US$300.

3) Maintain your deposit for 30 days. You get US$20 to US$200.