By now, you may have heard of the attractive yields on the Treasury Bills, or T-bills, issued by the Singapore government. Our domestic interest rates, which affect the T-bill yields, are largely influenced by global market movements, particularly the US rates.
With the US Central Bank continuing its pace of rate hikes, the yields on the six-month T-bill for the October 2022 (BS22121F) auction reached a multi-decade high of 4.19% per annum (p.a.). This was the highest since September 1988, when the return rate on the T-bill peaked at 4.73% p.a.
Given that it’s now without doubt a good arbitrage opportunity to invest your OA savings in T-bills to earn higher returns, as we previously covered in our article–Why Every Singaporean Should Apply To Invest Their OA Funds In T-Bill–the latest question to ask is whether you should be doing the same with your SA savings as the yields climb above the benchmark rate of 4%.
Recap: What Are Treasury Bills?
Treasury bills are also known as “zero coupon bonds,” as they do not issue any coupons during the life of the bond but instead are issued at a discount to their face value. Investors will receive the face value of the bond only upon maturity.
The T-bills, which are issued on either a six-month or a one-year tenor, require a minimum investment amount of $1,000. Anyone, including non-residents, can apply for T-bills as long as the individual is over the age of 18 and has a CDP account. You can buy T-bills with cash or with money from your Supplementary Retirement Scheme (SRS) and Central Provident Fund (CPF).
You Can Invest Your Excess SA Savings After Setting Aside The Amount Needed To Earn The Additional Interest
To invest in CPF-approved products using your money in the Special Account (SA), you must be over 18 years old and have set aside at least $40,000 as per the requirements under the CPF Investment Scheme (CPFIS).
The current interest rate on the Ordinary Account (OA) is 2.5%, while the interest rate on the SA is 4%.
CPF members who are under 55 years old can earn up to 5% interest on the first $60,000 of their combined CPF balances (capped at $20,000 for OA).
Whereas, for CPF members who are older than 55, they could earn up to 6% interest p.a. on their retirement balances. This is made up of an extra 2% interest that the government pays on the first $30,000 of their combined balance (capped at $20,000 for OA) and an extra 1% interest on the next $30,000.
If you are able to hold at least $20,000 in your OA, you would only need to retain the minimum amount of $40,000 in your SA. Any amount beyond that can then be invested through the CPFIS-SA for higher returns. Otherwise, you might want to keep at least $60,000 in your SA to benefit from the higher guaranteed rates before investing the excess funds for higher returns.
What Should The T-Bill Yields Be, And How Much Must You Invest?
The interest rate for the SA, which is reviewed quarterly, is computed based on the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%. Currently, it is stated on the CPF website as 3.06% for the period from August 2021 to July 2022.
Nevertheless, to help CPF members grow their savings, the government has provided a commitment to keep the 4% p.a. floor for the interest earned on all SA, MediSave, and Retirement savings until 31 December 2023.
This means that you should only invest your SA savings in T-bills if they produce above-average yields of 4% p.a. With that in mind, let’s deduce when it makes sense to invest in T-bills using your SA savings.
There are two types of costs that would be incurred and should be factored in when investing in T-bills using your SA savings.
First is the transaction cost of buying, holding, and selling using your SA savings. The buy and sell transaction using CPFIS can only be executed in person at any branch of the three local banks. It costs $2.50 for each transaction, and you would be charged a service fee of $2 (excluding GST) per counter per quarter.
Second, there is the opportunity cost of the loss of CPF interest on your SA savings when you transfer money in and out of your account to purchase the T-bills. Interest on CPF withdrawals would not be earned from the same month of withdrawal onward, and deposits would begin earning interest the following month from the date of contribution. Depending on the date of your investment, you may lose out on CPF interest from the month of withdrawal to the month of deposit.
For example, assume you invested in the below six-month T-bill that has a 4.19% yield on an investment amount of $1,000.
|Announcement Date||19 October 2022|
|Auction Date||27 October 2022|
|Issue Date||1 November 2022|
|Maturity Date||2 May 2023|
Your return would be as follows:
Total Interest Received For The Six-Month T-Bill = $20.95
Total Transaction Cost = $6.82*
Loss Of CPF-SA Interest = $26.66
Your SA funds would be withdrawn in the month of October 2022 to invest in the T-bills. Assuming you do not reinvest, you would then be able to return the money upon maturity in May 2023 and start earning interest from June 2023 onward. Therefore, your opportunity cost for the loss of CPF interest would be 8 months.
Total Interest Earned (Loss) = ($12.53)
You would have earned $12.53 less if you had invested $1,000 in the T-bills with your SA instead of leaving them untouched. This is due to the costs of making the transaction and the opportunity costs of losing the interest on the CPF during the investment period.
Therefore, it pays to know how high your yields should be and how much you need to invest in order to make investing in T-bills using CPFIS-SA worthwhile.
Only Invest In T-Bills With Your CPF-SA If The Yields Are At Least Above 5%
The benchmark CPF returns are computed for a 6-month T-bill, based on an opportunity cost of a 7- to 8-month period. The different T-bill issues may have different opportunity cost depending on their auction and issue dates.
|Investment Amount||CPF Benchmark Returns
(for 7 months)
|CPF Benchmark Returns
(for 8 months)
Table 1: CPF Benchmark Interest (Opportunity Cost)
Next, the T-bill returns are calculated for the 6-month investment period after subtracting the transaction cost of $6.82*.
|Investment Amount||T-Bill Yield Rate|
Table 2: Potential T-bill Returns (After Deducting Transaction Costs)
*GST of 8% was applied.
Comparing the two tables, we can first deduce that the yields on the T-bills must go above 5% before it makes sense to invest using your SA. Even if the T-bills had a 4.5% yield, it wouldn’t be sufficient to cover the loss of interest from CPF.
Second, you need to invest at least $5,000 or more, as the bigger the investment, the quicker you can break even. Looking at the $1,000, you may need to wait until the yields go above 6.5% to earn a higher return than the CPF returns. In contrast, with just $5,000, you can earn a slightly higher return if the T-bills reach a 5% yield rate.
Third, you should only apply using your CPF for T-bill issuances that have a shorter opportunity cost of 7 months. This would maximise your returns for the same investment amount and yield rate.
Should You Invest In The 6-Month Or 1-Year T-Bills?
We are still in the midst of a rising interest rate environment as inflation remains high globally. As such, you could choose to invest in the shorter-duration six-month T-bill and look to reinvest at a higher rate upon maturity.
However, given the uncertainty of how much and how long interest rates will rise, more risk-averse investors may prefer to lock in rates with the longer one-year T-bill, which has less reinvestment risk than the shorter six-month T-bill.
Another consideration to note is the frequency with which the T-bills are issued. For the six-month T-bills, they are issued every two weeks, giving you more chances for investing. On the other hand, the one-year T-bill is issued once every three months, and you may need to wait until next January for the next issuance.
Other Risks Factors To Consider When Investing In T-Bills Using CPF-SA
#1 CPF Interest Rates May Change
We have assumed the SA interest rates are 4% p.a. to determine the potential returns for investing in the T-bills. However, as the rates are reviewed quarterly, there is a possibility that the SA rates could be revised upward if interest rates continue to stay high.
This may result in needing higher-yielding T-bills in order to earn better returns than the CPF rates.
#2 Selling T-Bills Before Maturity May Result In Losses
T-bills can be bought and sold on the secondary market via the Singapore Exchange (SGX) or FSMOne before maturity. As the prices are determined by market forces, it may result in higher or lower prices than the initial issue price. Also, the trading volume on these securities is thin, which results in a wider spread.
Therefore, it is best to hold on to the T-bills until maturity to avoid unnecessary losses.
#3 Allocation For T-Bills May Be Unpredictable
As the returns on the T-bills rise, it would attract more yield seeking investors. This would result in higher competition, which would limit the amount each applicant may receive.
For example, in the last round of the six-month T-bill auction (BS22122Z) in November 2022, only 49.68% of the non-competitive applications were allotted to applicants.
Source: MAS – T-Bill BS22122Z
This means if returns get higher, it could become more unpredictable for investors to determine their investment amount. This could affect investors, as a small investment allocation may result in losses due to the associated cost factors.
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