The popularity of government-issued bond securities such as Treasury bills (T-bills) and Singapore Savings Bonds (SSB) rose to unprecedented heights in 2022. Brought about by the higher interest rate policy adopted by the Federal Reserve and the volatile stock market, these investments were favoured for their attractive returns (of around 3-4%) and capital protection.
In particular, T-bills are also seen as an alternative to bank fixed deposits to park one’s spare cash for short-term liquidity needs. They are offered either on a 6-month tenor, which is issued every two weeks, or on a 1-year tenor, which is issued every 3 months.
Since reaching a 30-year high of 4.4% yield in December last year, the 6-month T-bill rates have steadily fallen to 4% as of the last issuance on 18 January 2023. This recent downward trend might be a precursor to lower yields on the much-anticipated January 1-year T-bill issuance, whose yield will be determined upon the auction on 26 January 2023.
Given the uncertainty, should you take the risk by applying for a 1-year T-bill or instead opt for a bank fixed deposit that gives above 4%?
Demand For Treasury Bills Remains Strong, While Yields Have Fallen Slightly
Demand for T-bill applications has continued to remain strong compared to the auction amount since the start of 2022. Particularly, the total value of applications exceeded $10 billion in the past few auctions. This is depicted by the graph below.
On the other hand, the cut-off yield on the T-bills rose from a low of 0.48% in January 2022 to a high of 4.4% in December before tapering slightly to reach 4% in the latest auction in January 2023.
The recent fall in the cut-off yield also coincides with the stronger Singapore dollar, which has gained around 1.6% against the US dollar since the start of the year.
Read Also: Treasury Bills (T-bills): What Are They And How You Can Buy Them
What Is The Interest Rate Outlook In 2023?
To combat the high (and sticky) inflation, the Federal Reserve raised interest rates at an unprecedented pace in 2022, from 0.25% at the start of the year to a 15-year high of 4.50% by the end of the year. As Singapore’s monetary policy is currency-based, it takes reference from US interest rates. This resulted in higher yields on T-bills.
But with US inflation seemingly having peaked from its 40-year high of 9.1% in June 2022, some economists expect a slower pace of rate hikes in 2023 or possibly even rate cuts if the economy heads into a mild recession.
However, according to Fed officials’ projections, interest rates will rise moderately and remain at around 5% in 2023. If so, you do not want to lock in for a longer term of 1 year at the current 4% rate.
Source: Bloomberg
Read Also: Coping With Inflation In Singapore: What Can MAS Do (And At What Cost)?
What Are Your Choices – Competitive Bids Or Bank Fixed Deposits
Based on the recent closing levels of the 6-month and 1-year T-bills, the yields range between 4.03% and 4.08%. However, it’s possible that the rates could go under 4% for the upcoming 1-year issuance, depending on the level of bids.
One way to deal with this uncertainty is to place a competitive bid as opposed to a non-competitive bid. Instead of a non-competitive bid, which allocates based on the market cut-off yield, you could apply for a competitive bid. In this case, you are required to input the yield that you intend to bid, up to two decimal places. For example, you could place a bid of 4.10%, which means you will only receive the applied allotment if the cut-off yield is the same as or higher than your bid. Otherwise, if the cut-off yield is lower than your bid, you will not receive your application.
The other option is to park your spare cash in a bank fixed deposit. There is no uncertainty over either your allocation amount or the interest rate with which you would have to deal when making either a competitive or non-competitive bid for T-bills. This would be a more sensible approach than taking a gamble with T-bills, especially when the yields are on a downward trend.
Currently, the following banks offer at least 4% interest for a 12-month term on fixed deposit rates:
| Bank | Promotional Rate | Minimum Amount |
| Bank of China | 3.90% – 4.10% | $5,000 |
| CIMB | 4.15% – 4.20% | $10,000 |
| ICBC | 4.25% | $5,000 |
| RHB | 4.10% (placement via RHB Mobile SG App) |
$20,000 |
The downside of these bank FDs is the higher minimum investment amount required (which varies between the banks) than the T-bills, which have a low minimum investment amount of $1,000. Nevertheless, such products take out the guesswork, making your investment decisions simple.
Read Also: Beginners’ Guide To Fixed Deposits In Singapore
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