Guide to T-bill auction: How to make competitive bids

TL:DR

• T-bill competitive bids offer you an opportunity to invest in the bond only if yields are above a certain level. 
• MAS will allocate to the lowest yielding competitive bids first. However, this does not mean that we should put in the lowest possible bid. 
• We’d compare the yields of other instruments such as fixed deposits, and check out current T-bill interest rates before putting in competitive bids. 
• This can be adjusted depending on whether allocation or minimum yield is more important, and whether CPF funds are used to subscribe to the T-bills.  

What happened?

There were two things that surprised investors about the last T-bill auction on 10 November. 

For the first time in recent auctions, non-competitive bids were only able to get partial allocation for the T-bill.

The yield on the T-bill also came down to 4.0% p.a. from 4.19% in the previous auction as demand surged. 

Many in the Beansprout community started asking how does the T-bill auction works, and what could be a potential strategy in making competitive bids. 

Explaining how T-bill auctions work

Before we share our strategy about making competitive bids for T-bills, it is important to do a quick recap about how the T-bill auction is conducted. 

Using the previous T-bill auction on 10 November as an example, there was about $3.6 billion of non-competitive bids submitted. Another $10.6 billion of competitive bids were submitted to bring the total amount applied to $14.2 billion.

MAS will allocate to non-competitive bids but cap this at 40% of the total issuance of $4.5 billion. This meant that about $1.8 billion of T-bills were allocated to non-competitive bids, compared to the total non-competitive bids submitted of $3.6 billion. This led to an allotment ratio of 49.68%. 

Thereafter, MAS will start to allocate to the competitive bids. In this case, the competitive bids submitted at 3.0% would be allotted before the bids at 3.1%.

This would be allotted until the remaining $2.7 billion of the issuance is fully allotted. The cut-off yield of 4.0% is then set at this level where all the remaining $2.7 billion issuance is allotted.

All the allotted bids, including the non-competitive bids, and competitive bids below the cut-off yield, would be allotted the T-bill at the cut-off yield at 4.0%. 

Our strategy for making competitive bids for T-bills

Having gone through the process of how a T-bill is allotted, we share our 4 step guide to making competitive T-bill bids.

#1 – Compare to other instruments to set floor interest rate 

To determine what yield we should put in for competitive bids, we can think about what is the minimum level of return we’d expect for the T-bill.

That’s because if we put in a competitive bid at 1.0%, we must be prepared that there is a possibility that we might really be owning the T-bill that gives us just 1.0% p.a. return. 

We can compare the return we are able to get for the T-bill to other instruments in the market, such as the latest fixed deposit interest rates.

As an illustration, if the best fixed deposit rate we are able to get is 3.2%, then we'd consider using 3.2% as a gauge to put as a minimum yield required for the T-bill. 

#2 – Check current T-bill interest rate

Next, we’d check out the prevailing T-bill interest rate to get a rough sense of what the current market rate is. 

We can find out what the latest market yield of the 6-month T-bill on the MAS website.

This will potentially tell us what institutional investors think the current yield on the 6-month T-bill is. 

For example, the closing yield for the 6-month T-bill (BS22122Z) on 14 November is 4.02%. 

#3 – Decide how much allocation you want

Next, we can think about how important it is to get our target allocation (say $10,000).

If we want to make sure that we get full S$10,000 allocation, then we must be prepared that we may not get this allocated at our expected yield. 

In this case, we would lower our bid from the market yield, while keeping it above the interest rate we're able to get from other instruments. 

In this scenario, we would put in a bid below 4.0% but above the fixed deposit rate of 3.2% to increase our chance of getting the T-bills.

#4 – Make adjustments if bidding using CPF

You'd need to consider additional interest lost if you're bidding for T-bills using your CPF funds. 

As we shared in our previous article, you will lose at least one additional month of CPF interest payment when you use your CPF to invest in the T-bill.

In an illustrative example, if we were to make a competitive bid at 3.0% for $100,000 of T-bills and if that ends up being the cut-off yield, we’d only receive $1,500 for holding on to the T-bill for 6 months.

If we had kept the money in your CPF ordinary account instead, we would have received an interest payment of S$1,250 for the six months that we are earning the CPF interest rate of 2.5%. 

In addition, we will lose an interest payment of S$208 for the month that we invested in the T-bill.

In this case, what we'd be getting for the T-bill would not be significantly different compared to what we’re earning on the CPF OA after subtracting the CPF interest we missed and other fees! 

What would Beansprout do?

It's important to know how the T-bill auction works, regardless of whether we are making competitive or non-competitive bids. 

After all, the yield that everyone gets from the T-bill auction, will be determined by the competitive bids that come in. 

Apart from using the strategy we shared above, there are a few other things we can consider doing when investing in the T-bill. 

#1 – Submit multiple bids

Here’s a pro-tip: If you do not want to leave your T-bill bids to just one chance, you can spread out your competitive bids across multiple entries. 

This is where sizing becomes important as a consideration as well. 

For example, if we have $10,000 to invest in T-Bills, we may decide that we want to get at least $5,000 worth of T-bills at the minimum.

In this case, we can put in a $5,000 competitive bid at 3.3%, to increase our chances of getting the T-bill. 

We can also put in another bid for $5,000 at 4.0%. For this bid, we must be prepared that we may not be able to get any allocation if the cut-off yield ends up below 4%. 

#2 – Build a bond ladder 

The other way to reduce exposure to interest rate fluctuations is to build a bond ladder. 

A bond ladder can help to overcome the uncertainty of not knowing the cut-off yield in advance as interest rates earned are averaged out over time.

Find out more about how to build a bond ladder here.

Where can I find out more about the applying for the T-bill?

Find out all you need to know about T-bills with our Ultimate Singapore T-bill Guide. 

Join the Beansprout Telegram group if you’d like to learn from the other shifus in the community.