BS24118Z 6-Month T-Bill Yield Projection

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2024/09/10/bs24118z-6-month-t-bill-yield-projection/

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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Yield Premium Projection

The updated 6-Month T-Bill vs 12-Week MAS Bill Yield chart and the T-Bill Yield Premium Statistics table are shown below:

The cut-off yield of ML24136W is 3.30%. Considering the average yield premium of -0.23% and standard deviation of 0.09% in 2024 so far, the projected cut-off-yield for BS24118Z would be:

Projected Cut-Off Yield = 3.30% – 0.23% = 3.07%

Projected Lower Yield = 3.07% – 0.09% = 2.98%

Projected Higher Yield = 3.07% + 0.09% = 3.16%

Polynomial Trendline Projection

The last 5 projections using 3rd Order Polynomial Trendline had been increasingly overestimating the cut-off yield, where the actual yields were below the projected ranges. This suggests a change in interest rates environment is underway.

Let's take a look at the probabilities of the Fed Fund Rates movement in the following FedWatch Tool as of 9 September 2024:

The current Fed Fund Rate is 525-550 basis points, and the above chart indicates that the probability of rate easing in the 18 September 2024 meeting is 100%, 71% drops 25 basis points and 29% 50 basis points. Rate easing will probably continue till at least mid 2025.

If we look at the previous 3rd Order Polynomial Trendline projections, there were an upwards lift towards the end of 2024. This kind of upward-bending projection curve is unlikely to happen, so I decide to switch to 2nd Order Polynomial Trendline Projection method from this issue onwards, as shown below:

From this trendline projection chart, the projected yield is approximately at 2.78%, much lower than the approximately 3.60% for 3rd order polynomial trendline. With standard deviation of T-bill cut-off yield at 0.18% as seen in the T-Bill Yield Premium Statistics table in 2024, the projected cut-off-yield for BS24118Z would be:

Projected Cut-Off Yield = 2.78%

Projected Lower Yield = 2.78% – 0.18% = 2.60%

Projected Higher Yield = 2.78% + 0.18% = 2.96%

Summary

Yield Premium Projection: Projected Cut-Off Yield = 3.07%, ranging from 2.98% to 3.16%

Polynomial Trendline Projection: Projected Cut-Off Yield = 2.78%, ranging from 2.60% to 2.96%

The 2nd Order Polynomial Trendline Projection method turns out to be more inline with the Yield Premium Projection method. I'm projecting that the auction results is going to be between 2.78% and 3.07%.