Mid-November 2022 T-Bill: 4% p.a. Yield, Drop From Previous 4.19%
MAS has announced a cut-off yield of 4% for the latest t-bill (issuance date 15th November 2022), a drop from the previous t-bill which had a yield of 4.19% p.a. US Federal Reserve approved yet another rate hike recently, so this drop is rather surprising.
A testament to the popularity of t-bills, applicants applied for a total of $14.2 billion. MAS even had to delay the auction results, citing a high volume of applications. I thought such a process would more or less be automated, but now I’m imagining overworked interns at MAS scrambling to push out the auction results.
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How does bidding work?
From Singapore Savings Bonds to t-bills, the interest in government securities has been rising owing to, well, rising interest rates. T-bills, in particular, now have the spotlight after hitting a 34-year high of 4.19% p.a.
The cut-off yield for t-bills are derived from an auction process. Applicants can choose to put either non-competitive bids, or competitive ones.
If you place a competitive bid, you specify the amount as well as your desired yield. If your bid is lower than the cut-off yield, you get your desired amount allotted in full at the cut-off yield. If your bid is higher than the cut-off yield, you do not get any amount allotted.
For example, if I bid 4.1% p.a. and the cut-off yield was 4.19% p.a, I would get the total amount I placed allotted at 4.19% p.a. yield. If the cut-off yield was 4% p.a, I do not get any amount allotted.
For non-competitive bids, you only need to set your desired amount, and don’t specify a rate. You will be allotted at the cut-off yield, although if non-competitive applications exceed 40% of the total issuance amount (as it did this time), non-competitive applications will be allotted on a pro-rated basis.
If you placed a non-competitive bid this time, you will not get the full amount you applied for since there were just too much money coming from non-competitive bids.
Watch my video on what to look out for before you buy t-bills:
What would happen next?
I think there are two theories to what’d happen in upcoming t-bills. The first would be that more people might bid competitively to set a floor rate they are willing to accept (as I mentioned in my video). Rates are rising, and even bank deposits are giving more interest. There is little point in accepting anything under 4% p.a. when I can get over 4% p.a. in, say, OCBC 360 account.
Given that non-competitive bids now exceed 40% of the total issuance amount quite easily, there are some who are also planning to bid ridiculously low yields to ensure that they’d get full allotment of their funds. 4% p.a. (or maybe even high 3%) is good enough, and they want their entire sum allotted.
Unfortunately, this drives the cut-off yield down, so if more people do this, the t-bill rates become less attractive. This is perhaps the point of an auction system, so we’ll have to wait and see what upcoming t-bills hold. Who knew government bonds could actually be exciting?
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