Demand for Treasury bills, or T-bills for short, has increased among local investors due to the recent rise in interest rates. These short-term debt instruments, issued and backed by the Singapore government, provide a safe investment option for parking excess savings. The T-bills are available in two tenors: 6-month and 1-year.
The choice of tenor is crucial when investing in the T-bills, whether through cash, supplementary retirement scheme (SRS) funds, or CPF Investment Scheme (CPFIS) funds. It not only affects the yield that you will receive but also impacts the risks associated with your investment.
Though it might be tempting to lock in the rates for a longer tenor as the yields on the latest 6-month T-bill inch close to 4% per annum (p.a.), it’s important to understand the differences between the two tenors before deciding on the suitable option.
Duration And Maturity
The primary difference between a 6-month and 1-year T-bill lies in the tenor, or duration, of the debt instrument. As the name suggests, a 6-month T-bill has a maturity period of 6 months, while a 1-year T-bill matures after one year of issuance.
Which of these two you choose depends on your investment goals and liquidity needs. For instance, if you’re intending to maximise the returns for short-term expenses like wedding costs, home renovation, or year-end travel, then the shorter-duration 6-month T-bill might be ideal. On the other hand, if you’re investing your savings for the long term without an immediate need for the savings, the longer-duration 1-year T-bill offers greater investment return certainty.
Return On Investment
The tenor of the debt instrument also affects the yield, or return on investment. Typically, all else being equal, a bond with a longer maturity tends to have a higher interest rate compared to a shorter-term bond. This is to compensate the investor for bearing the higher interest rate risk associated with longer-duration bonds.
However, due to the hawkish interest rate policy the US Fed adopted this year, shorter-term bond yields are now higher than longer-term bond yields. This relationship between yield and bond maturity is depicted by the inverse yield curve below.
Source: World Government Bonds
This means you may get lower yields on the 1-year T-bills compared to the 6-month T-bills. The difference in yields can be observed by looking at historical month-end yield rates since 2022.
Based on the above two tables, the yields on the 1-year T-bills were slightly higher than the 6-month T-bills at the start of 2022. However, since September 2022, the rates on 6-month T-bills have stayed higher than the 1-year T-bills. Currently, the yield on the 6-month T-bills is around 20 basis points higher than the rates on 1-year T-bills.
From a return-on-investment perspective, investing in the shorter-term T-bills would allow you to maximise your returns as long as the short-term rates are higher than the long-term rates.
There are different forms of risk when investing in any investment instrument, including T-bills. However, as the T-bills are backed by the Singapore government, which has the highest credit rating, we can assume there is little to no credit or default risk. Nevertheless, the T-bills are subject to interest rate risk and reinvestment risk like any other debt instrument.
Interest Rate Risk
Unlike the relatively benign interest rate environment over the last decade, we are experiencing more volatility as central banks around the world raise interest rates to stem the high inflation. As a result, long-term bonds, which are more sensitive to interest rate changes, may face interest rate risk due to the inverse relationship between interest rates and bond prices. This means that if interest rates were to rise higher, the prices of T-bills would fall, affecting investors who sell them before their maturity.
In this scenario, a shorter-term 6-month T-bill might be preferred as the interest rate risk is smaller due to the shorter maturity period. Nevertheless, this may not be a concern if you intend to hold the T-bills until maturity.
Similarly, the volatility in interest rates also subjects the investor to reinvestment risk, which is the risk of having to reinvest the proceeds at a lower interest rate than the previous investment. In a falling interest rate environment, a longer-duration 1-year T-bill can mitigate reinvestment risk compared to the shorter-term 6-month T-bill since it locks in the rate for a longer period. Conversely, a shorter-term 6-month T-bill allows you to reinvest at a higher interest rate in a rising interest environment compared to a longer-term T-bill, which locks you in at a lower rate.
The choice between these two T-bill durations depends on your outlook on interest rates in the near future. The shorter-term T-bill would enable you to reinvest your funds at higher yields if you assume that interest rates will rise as indicated by the Fed – which predicted at least two more rate hikes by the end of this year.
On the other hand, if you take the view of most economists who predict that interest rates have topped and may fall from here, then locking at the current rates on a longer-term T-bill would maximise your potential returns.
Frequency Of Issuance
Lastly, the 6-month T-bill is issued more frequently, once every two weeks, compared to the 1-year T-bill, which is issued four times a year, once every quarter.
It may be beneficial for investors to build their positions in the T-bills over a few issuances instead of placing a lump sum investment on a single issuance due to the uncertainty over the interest rates for non-competitive bids and the allocation limit. For instance, in the previous BS23113V 6-Month T-bill issuance, non-competitive bid applicants were only allotted 96% of their application.
By spreading your investment over a few issuances, which is possible with the 6-month T-bill, you can minimise your exposure to an unfavourable interest rate if you were to make a non-competitive bid.
Upcoming 6-Month T-bills In 2023
|Announcement Date||Auction Date||Issue Date||Maturity Date||Issue Code|
|27 Jul 2023||03 Aug 2023||08 Aug 2023||06 Feb 2024||BS23115E|
|10 Aug 2023||17 Aug 2023||22 Aug 2023||20 Feb 2024||BS23116F|
|24 Aug 2023||31 Aug 2023||05 Sep 2023||05 Mar 2024||BS23117Z|
|07 Sep 2023||14 Sep 2023||19 Sep 2023||19 Mar 2024||BS23118S|
|21 Sep 2023||28 Sep 2023||03 Oct 2023||02 Apr 2024||BS23119H|
|05 Oct 2023||12 Oct 2023||17 Oct 2023||16 Apr 2024||BS23120A|
|19 Oct 2023||26 Oct 2023||31 Oct 2023||30 Apr 2024||BS23121E|
|01 Nov 2023||08 Nov 2023||14 Nov 2023||14 May 2024||BS23122F|
|16 Nov 2023||23 Nov 2023||28 Nov 2023||28 May 2024||BS23123Z|
|30 Nov 2023||07 Dec 2023||12 Dec 2023||11 Jun 2024||BS23124S|
|13 Dec 2023||20 Dec 2023||26 Dec 2023||25 Jun 2024||BS23125H|
Upcoming 1-Year T-bills In 2023
|Announcement Date||Auction Date||Issue Date||Maturity Date||Issue Code|
|20 Jul 2023||27 Jul 2023||01 Aug 2023||30 Jul 2024||BY23102N|
|12 Oct 2023||19 Oct 2023||24 Oct 2023||22 Oct 2024||BY23103V|
Understanding Your Needs And Knowing The Alternative Options
It is common to assume that investing in a 1-year T-bill guarantees the same return as a 6-month T-bill but for a longer duration. However, as explained with the inverted yield curve, the 1-year T-bill may not offer a better or equivalent yield to the 6-month T-bill. Additionally, you need to consider your liquidity and investment goals before deciding to lock in the rates for a longer duration.
Alternatively, you can explore other investment options, such as the StashAway Simple Guarantee. It provides similar capital protection and interest returns as fixed deposits, which could be suitable as short-term investments. Otherwise, you could also consider money market funds for longer-term investments.
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