The latest 6-month T-bill auction on 25 May was good news for investors: the cut-off yield jumped to 3.85%. While fixed deposit rates started declining, Singapore T-bill yields rebounded. Yay! What’s driving the rebound in the yield, and should we invest in T-bills?
T-bill Demand Rebounded
The last T-bill application amount went up to $12.2 billion (up slightly from $12 billion in the previous auction). Though not significant, the rise in demand still surprises investors because of the trend of lower interest rates and the possibility of losing a one-month CPF interest rate due to the unfavorable maturity date.
The rise in T-bill demand may be partly attributed to lower-interest-rate alternatives to fixed deposits, which have steadily declined over the past few months. This higher demand may contribute to a slight rebound in the final cut-off yield.
Larger T-bill Allotment Size
The last T-bill auction saw a total allotment of $5.3 billion, slightly higher than the previous issuance of $5 billion. The slight bump in allotment size may contribute to the higher cut-off yield, as more bids receive allocations.
US Interest Rate Rising & Market Expectation
The rebound in Singapore T-bill yield was unsurprising considering the recent rise in the short-term and long-term US Treasury rates.
Many factors were at play: the debt ceiling issue, a growing US economy, sticky inflation, the Fed continuing to raise rates, and the market not expecting interest rate cuts so soon.
With the market generally not expecting interest rate cuts anytime soon and expecting higher rates to persist, it is surprising that Singapore local banks are cutting their fixed deposit rates so quickly. The T-bill auction result shows that the market still demands higher short-term rates, at least for now.
Should We Invest in T-bills? Better than Fixed Deposits?
Many T-bill alternatives, such as cash management and high-yield savings accounts, offer yields above the latest cut-off of 3.85%. However, with these alternatives, there is usually a ‘catch.’ For example, some cash management accounts with higher interest do not guarantee your initial capital. High-yield savings accounts often require hoops to jump through to get the highest possible interest rate, which can make the effective interest rate much lower. Additionally, there is a limit on how much you can deposit to earn that high interest rate.
T-bills have no ‘catch’ because the initial principal and interest are guaranteed for the whole duration regardless of market volatility. There is also a very high ceiling on the amount you can buy. You can buy as much as you want (subject to allotment size). With these characteristics, the best comparison to T-bills is a fixed deposit.
With T-bills yielding much higher than fixed deposits, there is little reason to park your cash in fixed deposits. T-bills are simply more attractive right now. If you want to be sure, you can use the competitive bid when applying for T-bills to ensure you get the rates you can accept.
