Analysis of 6-Month T-Bill (BS22122Z) Auction Results

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2022/11/11/analysis-of-6-month-t-bill-bs22122z-auction-results/

Disclaimer: This post is just for educational sharing purposes. Please do your own due diligence on any products mentioned in this post.

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Yesterday (10 November 2022) auction results for the 6-month T-bill BS22122Z presents an unique and interesting case study for psychological analysis.

Pre-Auction Information

Let's take a look at the information given before the auction:

The Issue Details gives the dates for announcement, auction, issue and maturity. Yesterday was the auction day for BS22122Z.

MAS offered a total amount of S$4.5 billion for BS22122Z. The supply is S$100 million less than that of the last T-bill BS22121F (S$4.6 billion).

Auction Results

Usually the auction is closed by noon on the auction day, and the results are published at about 1~2 pm. But this time round there was a significant delay in publishing the auction results.

The following message was posted late at night on MAS "Bonds & Bills" webpage: https://www.mas.gov.sg/bonds-and-bills

Total amount applied was S$14.2 billion, the demand is 30% more than the S$10.9 billion in the last T-bill auction. The cut-off yield is 4% p.a., a -4.5% drop from 4.19% p.a. in the last T-bill auction.

There are 2 record-breaking data given in this message:

1. Total over 92,000 bids in this auction, far exceeds the last T-bill auction.
2. Volume of non-competitive bids exceeds 40% of overall issuance size, first time in T-bill history.

These factors combined resulting in taking much longer time to process and publish the auction results.

I notice one detail about pro-rated allotment of non-competitive bids in the footnote, that the final allotments are in denominations of S$1,000 (i.e. lot size is 10 units) and there were random adjustments to ensure that.

Analysis of Auction Results

Let's take a closer look at the full auction results published after 10:30pm:

Total Amount Allotted = S$4.5 billion

Total Amount Applied = S$14.2 billion

Total Bids Applied = over 92,000 bids

Average Bid Size = 14.2b / 92k = under S$154k

Total Non-Competitive Amount Allotted = S$1.8 billion

% of Non-Competitive Amount Allotted = 49.68%

Total Non-Competitive Amount Applied = 1.8 / 49.68% = S$3.6 billion

Total Competitive Amount Applied = 14.2 - 3.6 = S$10.6 billion

Total Competitive Amount Allotted = 4.5 - 1.8 = S$2.7 billion

Cut-off Yield = 4% p.a.

Median Yield = 3.5% p.a.

Average Yield = 2.87% p.a.

Cut-off yield higher than median yield (a.k.a. yield at midpoint) means that cut-off yield is in the upper half of the bidding range.

Average yield lower than median yield means that the lower half of the bidding range has much lower yield to drag the average yield down.

For average yield to be lower than both cut-off yield and median yield, there exists some bids that are lower than the average yield to offset the excess yield from cut-off yield and median yield.

Summary

• The slight reduction in supply and the big jump in demand has tipped the scales towards the demand side, resulting in the cut-off yield heavily influenced by buyers' behaviors.
• There are probably many newbies who were attracted by the high yield in the last T-bill, and they took the easy way of submitting non-competitive bids, resulting in over-subscription of non-competitive applications.
• Due to over-subscription, the final allotments to the non-competitive bidders are subjected to random adjustments to ensure lot size in multiples of S$1,000. Some of the small-sized non-competitive bidders might not get any allotment.
• There are also increased awareness of using CPF OA money to apply for higher yielding T-bill and this influx of CPF bidders probably contributed to the 6-digit average bid size.
• There are probably enough competitive bidders who submit low yields to secure full allotment at the auction, and collectively they dragged the cut-off yield down.
• The underlying driving force of all these investor behaviors is Greed, arguably the most powerful human emotion that attracts people into the world of investing.
• The bidders' psychological elements in T-bill auction make this an interesting case study for the Game Theory, a theoretical framework for conceiving social situations among competing players as described by Investopedia.