Exploring SGS T-bills

The recent hike in global interest rates led me to become interested in a type of financial instrument that I had never previously explored in-depth: Singapore Government Securities (SGS) T-bills.

If you are like me and largely unfamiliar with T-bills, you can either refer to MAS's informative site for individual investors [link], or refer to my summary:

• $1000 minimum investment amount
• Tenure of 1-year, 6-months, or 3-months
• Issued at discount to par
• Yield determined via auction. Competitive bids determine the cut-off yield, non-competitive bids  take the cut-off yield 
• AAA-rated

For the most recent issue of 6M T-bills (issue date 12 July 2022), the yield was 2.66% p.a. This makes T-bills a very compelling alternative to Fixed Deposits (FDs) that are issued by banks. In fact, the yield is much higher than the banks' FD rates (for 6M, smallest amount) as of time of writing, which are:

• DBS: 0.75% p.a.
• OCBC: 0.10% p.a.
• UOB: 0.05% p.a.
• (* Seeing how there is a 70 bp difference just between DBS and UOB, I would take these 'published' rates with a large pinch of salt. Note that there are often 'promotional' FD rates with certain conditions, e.g. UOB is offering 1.4% p.a. for 10M FD with minimum amount of $20k)

The latest 6M and 1Y T-bills are open for application from 14 July 2022. Their respective auctions will take place on 21 July 2022, and the T-bills will be issued on 26 July 2022. This is my first time applying for T-bills, and I plan to:

• Apply for some 6M T-bills via non-competitive bid. If allotted, I will get whatever cut-off yield that is determined through the auction. Given interest rate trends, I expect this to be equal to or better than 2.66% p.a. Based on the results of the most recent issuance, 100% of non-competitive bids received an allotment, and I expect a similar high rate of allotment for non-competitive bids this time round. 
• Apply for some 1Y T-bills via competitive bid. I will only receive an allotment if the cut-off yield (determined via auction) is equal to or better than my bid yield. For example, if I bid 3.25% but the cut-off is 3.05%, I will receive zero T-bills. The allotment rate for competitive bids is not as high as that for non-competitive bids, so I may end up with a partial allotment even if the first condition is met. I have not yet decided what I will bid, but I'll likely aim for something in the region of 3% p.a. or higher. [edit: Closely watching the YTMs of past issues of SGS Bonds, especially the one expiring in July 2023. At time of writing, the MAS SGS Bond Calculator indicates around 2.79% p.a. YTM so that should roughly correspond to the cut-off yield for the upcoming 1Y T-bill issue.]

How are T-bills different compared to Singapore Savings Bonds (SSB)

SSBs are probably slightly better understood among the general Singapore population. Every month, a new tranche of SSBs is issued, with a schedule of rates for the next 10 years. Key differences:

• Tenure: SSBs have flexible tenure, in that the holder can sell them at any time within the 10 year period, and receive pro-rated interest up to the point of sale. In comparison, T-bills are more like  fixed deposits.
• How the holder attains yield: SSBs distributes interest in the form of coupon payments every 6 months to SSB holders. T-bills are issued at discount to par, so the T-bill holder only realizes the yield at the end of the tenure period.
• Allotment: For recent issues of SSBs, there has been oversubscription and hence many receive partial allotments only. For T-bills, it appears that non-competitive bids have a fairly high chance of full allotment, based on recent trends.

The oversubscription for SSBs has become a something of a problem - if you actually want to buy $50k of SSBs, but end up only getting a $20k allotment, you then have to figure out what to do with the remaining $30k. If you let it sit in the bank, it gets eroded by inflation.

Hence I am keen to try out a non-competitive bid for the 6M T-bill, essentially guaranteeing full allotment (but I do not have a direct say in the yield), whereas for the 1Y T-bill, I'm considering a competitive bid since I would prefer that it clears the 3% hurdle. [edit: See edit above; unlikely to surpass 3% p.a.]