6-month T-Bills Auction on 1 Feb – Will interest rates break 4.0% or drop again? Why I am buying Money Market Funds over T-Bills?

So the next 6-month T-Bills auction is on 1 Feb.

Unfortunately, after closing as high as 4.07% a few months ago.

T-Bills yields have since dropped to 3.70%.

US interest rates have also plunged since late October – with the market pricing in a whopping 6 interest rate cuts in 2024.

While this week’s 1-year T-Bills saw very high demand – that we may see spill over to the 6-month T-Bills (especially for those who were unsuccessful in their bidding).

This raises a couple of questions:

1. What is the estimated yield on the next 6-month T-Bills?
2. Are money market funds a better buy than T-Bills?

Next T-Bills auction is on 1 Feb (Thursday) – (BS24102S 6-Month T-bill)

First off – next 6 months T-Bills auction is on 1 Feb (Thurs).

This means that:

• If you’re applying in cash do apply by 9pm on 31 Jan (Wed)
• If you’re applying using CPF-OA do apply by 30 Jan (Tue)

What is the estimated yield on the next 6-month T-Bills auction? (BS24102S 6-Month T-bill)

I’ll split the analysis up into 2 parts:

• Fundamentals perspective (economic growth, inflation, global interest rates etc)
• Technical perspective (supply-demand)

(1) Fundamentals perspective:

T-Bills trade at 3.70% on the open market

6-month T-Bills are trading at 3.70% on the open market.

But… T-Bill trading liquidity is incredibly thin

But we’ve seen the past few auctions that trading liquidity on the T-Bills is so thin (just look at trading liquidity in the chart above) – that actually the market pricing is not that indicative.

You’ll find that the market pricing actually takes its cue from the latest T-Bills auction.

The past few auctions where the T-Bills auction yield diverged materially from market price (whether up or down).

It was actually market price that adjusted to the latest T-Bills auction yield, rather than the other way around.

So I would caution against placing too much reliance on market pricing on T-Bills – there just isn’t sufficient trading liquidity for true price discovery.

12-week MAS Bills down slightly to 4.00%

The institutional only 12-week MAS Bills are down slightly.

Sharp moves in MAS Bills are a good indicator of the trend for T-Bills.

So as of now, MAS Bills are pointing towards a downtrend in yields.

If you are submitting a competitive bid I do suggest taking a quick look at the latest MAS Bills pricing before you apply.

If there is a sharp move up or down – that could suggest a similar trend for T-Bills (can access it here).

US Interest Rates have plunged – huge expectations for interest rate cuts in 2024

The market is overwhelmingly pricing in interest rate cuts in 2024.

The market today is pricing in 6 interest rate cuts in 2024 – a total of 1.5% in rate cuts:

That said, the market is no longer pricing in an interest rate cut in March – the first interest rate cut has been moved out to May.

From a Technicals, supply-demand perspective

From a more micro perspective, what matters is the supply-demand dynamics.

T-Bills Supply is down slightly to $6.3 billion (vs $6.4 billion previous auction)

The last T-Bills auction had $6.4 billion T-Bills on offer.

This auction – T-Bills supply is down slightly to $6.3 billion.

Given what is likely to be very high demand for the T-Bills, this isn’t really a great sign.

Demand for T-Bills increased to $13.6 billion (vs $12.8 billion the previous auction)

In the latest T-Bills auction, demand for T-Bills increased 6.25% to $13.6 billion (vs $12.8 billion the previous auction).

This is not a good sign – as demand remains very high, while supply is going down.

You can see how current levels of T-Bills demand is close to the highest it has been in all of 2023:

Demand for 1-year T-Bills was insanely high

Do note that the 1-year T-Bills auction this week saw very high demand.

The auction saw $14.4 billion in applications (for $4.5 billion on offer).

This was a whopping 21% higher than the $11.9 billion for the previous 1-year T-Bills auction, and a 3.19 bid to cover ratio.

This led to a sharp drop in yields to 3.45% (vs market yields of 3.75%).

That means a lot of refunds, and you could see some of that excess demand flow over into this T-Bills auction, further pressuring yields.

T-Bills yields dropped slightly to 3.70% (vs 3.74% the previous auction)

There was a slight drop in T-Bills yields the last auction to 3.70% (3.74% the previous auction).

T-Bills yields are close to the lowest in all of 2023, and yet demand is still near record highs.

Median Yield – Average Yield spread coming down – less “lowballers”?

To illustrate what this is:

Imagine you have 100 bids.

The median yield, is if you arrange all the bids from small to high, and take the yield of the 50^th bid.

While average yield, is adding up the yields of all 100 bids and dividing by 100.

So average yields are skewed by lowball bids, while median yields are not.

To put it simply – the bigger the spread between the median yield and average yield, the more “low-ballers”.

And with the most recent few T-Bills auction before this, spreads completely blew out – close to the highest in 2023.

In the latest auction – spread have started to stabilise:

This is a not a great sign, as it shows that investors are still submitting low-ball bids to secure allocations.

Estimated yield of 3.55% – 3.75% on the 6-month T-Bills auction? (BS24102S 6-Month T-bill)

Let’s put it all together.

Market is pricing in 6 interest rate cuts in 2024, although the probability of a March rate cut has dropped.

SGD interest rates have been on a downtrend the past week or so.

Meanwhile demand for T-Bills remains at very high levels – and this week’s 1-year T-Bills auction saw very high demand.

While supply of T-Bills is down slightly this auction.

Given all of the above – I think there is a bit of downside risk for T-Bills yields here, vs the market yields (3.70%).

I would probably go with an estimated yield of 3.55% – 3.75% on the next T-Bills auction.

Do note that this is just an estimate, and actual yields can vary if demand is very high, or bidding is funky.

Should you submit a competitive or non-competitive bid?

I usually encourage investors to submit a competitive bid (just in case there is a freak result and yields drop a lot – like you saw with the 1-year T-Bills this week).

And submit as close to the deadline as you can, so you can take a look at where market pricing is at that time before deciding on your bid.

But I know some investors really don’t like competitive bidding.

In which case non-competitive bidding is probably fine as well.

But do note that with non-competitive, if there is a freak result and yields drop to 3.0%, you are still forced to buy.

What yield to submit with competitive bidding?

Some of you have asked how to approach competitive bidding for T-Bills.

Apparently there are others out there who are advocating for submitting low bids like 1.5% just to ensure you get an allotment.

I don’t really agree with that kind of reasoning, and if everyone were to do that you’ll see T-Bills close at ridiculously low yields.

I would say to think about the minimum yield you are prepared to buy the T-Bills.

Let’s say any yield below 3.60% and you would prefer to just go with money market funds.

Then a competitive bid around the 3.60% range may make sense.

Don’t forget that you can submit multiple bids.

So you can submit a bid for $20,000 of T-Bills at 3.60%, and another $10,000 at 3.80%.

This allows you to buy more T-Bills if yields close high, and yet still get some if yields close low.

There is no application fee for T-Bills bids too, so this isn’t an issue.

Are T-Bills still worth buying vs Money Market Funds, Singapore Savings Bonds or Fixed Deposit or Savings Accounts?

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Money Market Funds pay about 3.8% – 4.1% yield – I have been moving more cash into Money Market Funds

With the drop in T-Bills yields, Money Market Funds are actually pretty competitive these days – and I have been moving more of my money into T-Bills.

Mari Invest, which is the money market fund solution via Mari Bank in a tie up with Lion Global, pays about 3.8% – 4.1% (exact yield fluctuates over time).

Likewise Fullerton SGD Cash Fund pays about 3.6% – 3.9%.

Money Market Funds are technically not risk free though – so this is a big point to note.

I’ve extracted the asset allocation for Mari Invest below (exact fund is Lion-MariBank SavePlus).

Almost 70%+ of the assets are parked in MAS Bills backed by the Singapore government, so risk should be on the lower side.

However just like all money market funds, this is technically not risk free, and in extreme situations there is a possibility of capital loss.

The benefit though, is that you can get your money back with T+1 liquidity, which is a big plus vs T-Bills

I personally have started putting some cash into Money Market Funds instead of T-Bills, due to the liquidity benefits and yields that are competitive vs T-Bills.

Singapore Savings Bonds are not an attractive buy

Yields on the latest Singapore Savings bonds are:

• 2.72% for the first 7 years
• 2.81% for 10 years

I don’t think SSBs are that attractive anymore given that most investors should have locked in the 3%+ yields just a few months back.

Best Fixed Deposit option? CIMB pays 3.50% for 6 months

The best Fixed Deposit option I could find today is CIMB which pays 3.50% for 6 months.

Minimum of $10,000 deposit.

So if you don’t want to buy T-Bills, but want something risk free (below SDIC limit), this is probably the next best thing.

Picking between T-Bills vs Money Market Funds vs Singapore Savings Bonds vs Fixed Deposit vs Savings Accounts?

I would say if you want the highest short term yield, T-Bills / Money Market Funds are probably your best bet today.

The benefit of T-Bills is that it’s risk free, and you lock in the rates for 6 months, but at the cost of liquidity.

The benefit of Money Market Funds is that you can get the money back anytime with T+1 liquidity, but it’s technically not risk free, and the rates fluctuate over time.

Singapore Savings Bonds are not as attractive anymore after the drop in 10 year interest rates, so I wouldn’t bother with SSBs unless you’re really desperate to lock in yields.

Where am I parking my cash for liquidity?

Apart from T-Bills, I’ve been parking my cash in a mix of the following for liquidity:

Maribank pays 2.88% on up to $75,000, SDIC insured

The Maribank Savings Account pays 2.88% on up to $75,000, with no minimum amount, no hoops to jump through, and SDIC insured.

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