6-month T-Bills Auction on 15 Feb – Will interest rates cross 4.0% or fall again? Are Fixed Deposits or Money Market Funds a better buy than T-Bills?

So the next 6-month T-Bills auction is on 15 Feb.

After closing as high as 4.07% only a few months ago.

T-Bills yields have since plunged to 3.54%.

This raises a couple of questions:

1. What is the estimated yield on the next 6-month T-Bills?
2. Are money market funds or fixed deposits a better buy than T-Bills?
3. Where to park cash today?

Next T-Bills auction is on 15 Feb (Thursday) – (BS24103H 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 14 Feb (Wed)
• If you’re applying using CPF-OA do apply by 13 Feb (Tue)

What is the estimated yield on the next 6-month T-Bills auction? (BS24103H 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 3.59% on the open market

6-month T-Bills are trading at 3.59% on the open market.

Interestingly – T-Bills were trading as low as 3.52% just a couple of days ago, but yields have since gone up to 3.59%.

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 continue dropping to 3.93%

The institutional only 12-week MAS Bills have continued their downtrend – from 4%+ to 3.93% today.

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 5 interest rate cuts in 2024 – a total of 1.25% in rate cuts:

That being said, it was just a few weeks ago that the market was pricing in a March rate cut, and 6 interest rate cuts in 2024.

After the latest FOMC and Powell interview, the market has pared back those expectations.

So this might actually be bullish for interest rates (in the sense of higher rates).

From a Technicals, supply-demand perspective

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

T-Bills Supply is going up to $6.6 billion (vs $6.3 billion previous auction)

On the bright side – the amount of T-Bills on auction is going up.

Whereas the last auction had a drop in the amount of T-Bills to $6.3 billion, contributing to the sharp drop in yields.

This auction we’ll see the supply go back up to $6.6 billion.

You can see how the T-Bills supply is the highest in the past 1.5 years:

Demand for T-Bills increased to $14.6 billion (vs $13.6 billion the previous auction)

That said, demand for T-Bills remains overwhelmingly high.

Last auction saw $14.6 billion in application demand, up 7.35% from $13.6 billion the previous auction.

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

T-Bills yields plunged to 3.54% (vs 3.70% the previous auction)

Because of this, T-Bills yields plunged to 3.54% the previous auction.

T-Bills yields are breaking new lows, 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”.

In the latest auction – spread have started to drop from their highs, and yet yields continue to drop.

Estimated yield of 3.50% – 3.65% on the 6-month T-Bills auction? (BS24103H 6-Month T-bill)

Let’s put it all together.

Market is pricing in 5 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, although T-Bills pricing on the market has jumped from 3.52% to 3.59%.

Meanwhile demand for T-Bills remains at record high levels.

The saving grace though, is that supply of T-Bills is going up this auction to $6.6 billion.

Given all of the above – I think you may see T-Bills yields stabilise around these levels, with a possible increase vs the previous auction.

I would probably go with an estimated yield of 3.50% – 3.65% 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.

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% – 3.9% (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:

• 2.74% for the first 6 years
• 2.88% 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? 3.55% with State Bank of India, or 3.50% with CIMB

The best Fixed Deposit option I could find today is State Bank of India with 3.55% for 6 months.

Minimum deposit of $50,000 though.

If that’s too high, CIMB 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.

What to ask yourself – split cash between T-Bills, Fixed Deposit and Savings Accounts?

A lot of you have asked what to consider when deciding how much cash to split between each of the following options:

1. T-Bills
2. Fixed Deposits
3. Money Market Funds
4. High Yield Savings Accounts

The way I see it, it’s broadly a 2 step process:

1. How much liquid cash do you need?
2. Rest goes into highest yield options – based on your comfort level on risk

Key question to ask – how much liquid cash do you need?

I would say the key question to ask is how much liquid cash you need, to meet your spending needs the next 6 months.

Think about how much you need to spend.

Then think about how much cash you are expecting to come in over the next 6 months.

The difference is the amount of liquid cash you would need.

So if all of your spending needs are going to be met by your salary, or if a big bonus is coming in – then you can actually run very little liquid cash.

Whereas if you’re going to buy a house, a new car, or a big renovation, you’ll need to plan ahead and have that amount of cash set aside in liquid cash.

Some guidelines on liquidity – better safe than sorry

As a general note I would say don’t be stingy with liquidity.

It’s one of those where it’s better to be safe than sorry.

So after you run the analysis above – you’ll want to buffer for unexpected scenarios too.

For example a big medical bill that you need to pay upfront, then claim from insurance after.

A big car repair bill.

A decline in stocks that leads you to want to buy some stocks / REITs.

A loss of job, meaning no income in the short term.

Things like that.

As a general note I would say you always want to have enough liquid cash on hand to cover 6 months worth of expenses, as a worst case scenario.

Liquid Cash should go into options accessible on short notice – savings accounts, fixed deposits, money market funds

Once you have the number above.

That amount of liquid cash, should go into options that you can get back with ideally a day or two’s notice.

That will include:

1. High yield savings accounts (eg. UOB One, OCBC 360) – as a savings account you can withdraw any time
2. Fixed Deposits – can break anytime by telling the bank, although you will lose accrued interest
3. Money Market Funds – they are T+1 liquidity

Number (1) tends to have the highest interest rates, with accounts like UOB One paying a 5.0% effective interest rate on $100,000.

So that should be the priority – and you shouldn’t move on to fixed deposits or money market funds until you’ve maxxed out this option.

Singapore Savings Bonds is an outlier, because technically the money only comes back at the start of the next month.

In a worst case scenario if you just missed the redemption window, you might need to wait a whole month to get the money back:

I would say some Singapore Savings Bonds is fine as you can get the money back reasonably quickly, but don’t overdo it and put 90% of your liquid cash into Singapore Savings Bonds.

Rest of the cash goes into highest yield options – based on your comfort level on risk

Once you have the above – the rest just goes into the highest yielding option.

As of today, that’s probably Money Market Funds like MariInvest or Fullerton SGD Cash Fund.

But Money Market Funds are technically not risk free, so I know not everyone is comfortable putting their entire nest egg into something that is not zero risk.

In which case you can consider T-Bills or fixed deposits.

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.

Where am I parking my cash for liquidity?

Personally, 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.

Pretty much a no brainer if you have spare cash and want to generate a higher yield without any lockup or any requirements to fulfil.

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This article was written on 8 Feb 2024 and will not be updated going forward.

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