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.
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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