Sunday 1 October 2023

Delving into why T-bills went to 4% Yield

This week T bills went to 4% and that is headlines news to the yield hungry community of Singapore. Yields in Singapore has been relatively low where a 4% risk free instrument is rare (unlike what UK/Europe/USA risk free bonds offers at 4-5%).

What made Singapore T bills go to 4%?

The answer is simple. This T bill tranche had the lowest application amount of US$9.3 billion.

Where Did the Money Go?

If I were to venture a guess, most of the money that did not bid for Singapore's T bills are institution money which are more mobile. With countries such as Europe offering risk free rates of 4%, it is more intuitive to park funds there. This results in Singapore T bills having a lower demand and hence a higher cut off yieldr. Somehow the cut off yield for this tranche matches the rates announced by the Europe Central Bank. 

This might mean that T-bills yield could be unofficially following the Europe Central Bank.

For individuals, if one has the ability to bid overseas T bills, both USA and Europe T bills are at a much higher rate than our T bills. If you have a large amount of cash, the banks will offer spot rates exchange rates which means you do not lose 1% in exchange rate transactions. (My bank requires me to exchange SGD100,000 in 1 transaction to be eligible for close to spot rate FX exchange)

In all likelihood, what may remain is that CPF OA funds will be the only major party bidding for Singapore T bills because CPF OA is at 2.5% while T bills are at 4%. Hence there is an interest rate differential.

Have Spare Cash? Consider Instruments Beyond T bills

In my unqualified opinion, those who have spare cash (that are non-CPF) but with needs to utilise it within a short timeframe (less than 12 months) should consider T-bills. However, for those with a longer timeframe, the world is your oyster. 

Globally interest rates (with the exception of Japan) will remain high and for a longer period (until end 2024). This has pushed up prices of REITs with overseas REITs now yielding 10% and more; locally, Keppel REIT gives 7%. Beyond REITs, presumably large cap companies such as ICBC, CCB are now valued at 8% dividend yields. For REITs when central banks interest rates start lowering their interest rates, there is an expectation that REITs share prices will increase due to the inverse relationship of interest rate and REIT share prices. 

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