Guide to Treasury Bills (T-Bills)

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2022/11/14/guide-to-treasury-bills-t-bills/

Refer to the list of acronyms on CPF and Investment in the following blog posts: https://pwlcm.wordpress.com/2022/01/06/acronym-cpf/ https://pwlcm.wordpress.com/2022/01/07/acronym-investment/

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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Since I published the blog post "Guide to CPF SA Shielding Using T-Bills" last month, the cut-off yield has crossed 4% p.a. in the 1 November 2022 issue of the T-Bill. The relatively high yield of T-bills had attracted many retail investors to this previously ignored fixed income instruments, not only for the purpose of SA Shielding, but also for general short term investing using cash, SRS and CPF.

Therefore, it makes sense for me to extract what I had written on T-bills from that SA Shielding blog post, amend and expand it to provide an extensive guide on T-bills from a general investing perspective.

What are Treasury Bills (T-Bills)?

T-Bills are short term Singapore Government Securities (SGS) issued by Monetary Authority of Singapore (MAS) at a discount to their face value. Investors would receive the full face value at maturity.

As it is fully backed by the Singapore Government, T-bills are considered a risk-free AAA-rated fixed income instrument. There are 2 tenors, 6 months or 1 year T-bills that MAS issues. The T-bill is issued at S$100 face value.

The interest rate is determined by auction, and the interest is paid as a discount upfront to successful applicants after auction results are released. The full face value of T-bill is returned to investors at maturity.

Where to Find the Schedule of T-Bills?

MAS published an Auctions and Issuance Calendar for the year around October/November the year before: https://www.mas.gov.sg/bonds-and-bills/auctions-and-issuance-calendar

At the calendar webpage, click the T-bills tab and the "+" button beside the 6-Month and 1-Year T-bill headings to view a complete list of T-bills in the year.

The 4 key dates refer to the dates when T-bill information is announced, when auction results are released, when T-bill is issued, and when it is mature. The Tenor column is self-explanatory, it refers to the tenor of the T-bill.

The T-bill can be identified by the Issue Code (given by MAS) or the ISIN Code (ISIN stands for International Securities Identification Number, a 12-digit alphanumeric code given by ISIN Organization that uniquely identifies a security).

The state of a specific T-bill is given under the Status column:

• Upcoming: Refers to upcoming T-bill not yet open for applications.
• Open: Refers to T-bill announced and opened for applications, but not yet auctioned, and you can click the "View details" link to read about the Issue Details.
• Closed: Refers to T-bill closed for applications, either to be auctioned or issued soon, and you can click the "View details" link to read about the Auction Results after they are released.

The 6-month T-bills are issued fortnightly and the 1-Year T-bills quarterly.

How to Apply for T-Bills?

You can apply for T-bills using cash, Supplementary Retirement Scheme (SRS) funds or CPF Investment Scheme (CPFIS) funds: https://www.mas.gov.sg/bonds-and-bills/investing-in-singapore-government-securities/Buy-SGS-at-Auction-Information-for-Individuals

• For cash application, you will need an individual CDP account with Direct Crediting Services (DCS) linked to your bank account with one of the 3 local banks (DBS/POSB, OCBC, UOB). Application can be done through the bank’s ATMs and internet banking portal.
• For SRS application, you will need a SRS account with one of the 3 SRS operators (DBS/POSB, OCBC, UOB). Application can be done through the bank’s internet banking portal.
• For CPF application using OA, you will need a CPF Investment Account (CPFIA) with one of the 3 local banks (DBS, OCBC or UOB) and application can only be done in person at any branch of your CPFIA agent .
• For CPF application using SA, CPFIA is not needed, but you will need a Debt Securities Account with one of the 3 local banks (DBS, OCBC or UOB). Application can only be done in person at any branch of the banks.

While the T-bills application cut-off time is by noon on the auction day, the banks may close the applications deadline 1 to 2 business days before the auction. It is advisable that you check with your bank for the exact cut-off time. You can set alarm on your mobile phone to remind you to apply for T-bill.

How to Submit the Bids for T-Bills?

The minimum bid amount for T-bills is S$1,000, and you have to submit your bids in multiples of S$1,000. You can submit multiple bids within the same fund source and across different fund sources (cash, SRS, CPFIS). There is a cap of S$1 million per auction, but no limit in term of total T-bills investment amount you can accumulate over multiple tranches.

Let's take a look at the auction terms for the latest T-bill issue (BS22122Z): https://www.mas.gov.sg/bonds-and-bills/auctions-and-issuance-calendar/Auction-T-bill?issue_code=BS22122Z&issue_date=2022-11-15

For this T-bill issue, MAS offers S$4.5 billion to investors. The auction is conducted based on uniform price auction, meaning once the cut-off yield is determined after the auction, those who bid at the cut-off yield or lower will get allotment.

There are 2 types of applications: competitive and non-competitive. Competitive applicants would submit bids (yes, they can submit multiple bids) indicating the minimum yields they are willing to accept, whereas non-competitive applicants do not participate in the bidding process. All competitive and non-competitive applicants who succeed in getting allotment (full or partial) would get the cut-off yield.

There are 3 things you need to decide when you submit your bids for the T-bill:

1. You decide on which source of funds (cash, SRS, CPF) you want to use to apply for T-bill, and you can use the corresponding channels to apply.
2. You decide on how much you want to invest (investment amount) in each source of funds, the amount must be in multiples of S$1,000.
3. You decide on which type of applications (competitive or non-competitive) you want to submit.

For cash and SRS applications, the full investment amount would be deducted from your bank and SRS accounts respectively upon applications.

For CPF applications, only the discounted capital (i.e. capital minus interest) would be deducted from your CPFIA for successful bidders after allotment is confirmed.

How is the Allotment Done for Non-Competitive Applications?

After the application is closed, non-competitive bids would be allotted first, and the allotment is capped at 40% of the total amount offered. If the total amount of non-competitive bids is within the 40% allotment cap, all non-competitive applicants would receive full allotment.

However, if there is an over-subscription, the applicants would receive partial allotment on a pro-rated basis:

• Allotment Ratio = Total Amount Allotted / Total Amount Applied

To ensure that the final allotments are in denominations of S$1,000, there would be random adjustments to the allotment. This means there is a possibility that some small bidders (e.g. S$1,000) might not get any allotment.

How is the Allotment Done for Competitive Applications?

After the non-competitive applications are settled, all the competitive applications would be arranged in ascending yield order (i.e. from the lowest to highest yields). The amount applied for each yield are accumulated starting from the lowest yield, and when the cumulative amount exceeds the amount offered to competitive applications (which is total amount offered minus amount allotted to non-competitive applications), that would be the cut-off yield.

The allotment for the competitive applications are done in the following manner:

• Those who bid lower yield than the cut-off yield would get full allotment.
• Those who bid exactly at the cut-off yield would get pro-rated allotment, i.e. the balance amount offered to the applicants at cut-off yield would be distributed in proportion to the amount they applied.
• Those who bid higher yield than the cut-off yield would get nothing.

Again, random adjustments are done to ensure the final allotments are in multiples of S$1,000.

Where to View the Auction Results?

Usually the auction is closed by noon on the auction day, and the results are published at about 1~2 pm. You would need to click the Auction Results tab to view the results: https://www.mas.gov.sg/bonds-and-bills/auctions-and-issuance-calendar/Auction-T-bill?issue_code=BS22122Z&issue_date=2022-11-15

From the auction results, we can view and derive various information about the applications and allotments:

• Total Amount Allotted = S$4.5 billion
• Total Amount Applied = S$14.2 billion
• Bid-to-Cover Ratio = $14.2b / $4.5b = 3.16
• Total Non-Competitive Amount Allotted = S$1.8 billion
• % of Non-Competitive Amount Allotted = 49.68%
• Total Non-Competitive Amount Applied = $1.8b / 49.68% = S$3.6 billion
• Total Competitive Amount Applied = $14.2b – $3.6b = S$10.6 billion
• Total Competitive Amount Allotted = $4.5b – $1.8b = S$2.7 billion
• % of Competitive Amount Allotted at Cut-off = Approximately 64%
• Cut-off Yield = 4% p.a.
• Cut-off Price = S$98.005
• Median Yield = 3.5% p.a.
• Median Price = S$98.255
• Average Yield = 2.87% p.a.
• Average Price = S$98.569

How does Random Adjustment to Allotment Work?

This BS22122Z auction is the first time in T-bill history that the non-competitive applications are over-subscribed, resulting in a 49.68% allotment ratio. This is where I learnt about random adjustment to ensure the final allotments are in multiples of S$1,000.

For example, if you submit a non-competitive application of S$100,000, the allotment would be S$100,000 x 49.68% = S$49,680. To ensure the final allotment is in multiples of S$1,000, the system would randomly round up or round down your allotment to S$50,000 or S$49,000.

For non-competitive applications with small investment amount like S$1,000, the random round up or round down adjustment would land you in either full allotment (S$1,000) or no allotment.

What is the Cut-Off Price?

T-bill doesn't pay interest, instead gives a discount upfront to achieve the cut-off yield. The cut-off price is the discounted capital (i.e. capital minus interest) you pay for one unit of T-bill, and is calculated from cut-off yield based on the following steps:

1. Face Value = $100
2. Cut-off Yield = 4% p.a.
3. Term to Maturity = 182 days
4. Pro-rated Interest = $100 x 4% x 182 / 365 = $1.995
5. Cut-off Price = $100 – $1.995 = $98.005

For an allotted amount of $10,000, the successful applicant would receive $199.50 interest as a discount upfront, and also receive 100 units of the T-bills on the issue date with a net payment of $9,800.50.

Where to Find the Term to Maturity?

Take note that the calculation of pro-rated interest for 6-month T-bill is not based on half of the per annum yield, but it is based on a granularity in days. One can count the number of days from issue date to maturity date, but I found a way to get the Term to Maturity using the statistics search tools on MAS website: https://eservices.mas.gov.sg/statistics/fdanet/BondTreasuryBillsCMTBsAuctions.aspx

Just key in the Issue Code and check the data you want. Term to Maturity at Auction is the information we are looking for. You can either click the DISPLAY button to show the information on the browser, or click the DOWNLOAD button to get a Command-Separated Values (CSV) file that can be opened with Microsoft Excel.

The search results show that BS22122Z has a Term to Maturity of 182 days. If you search all the T-bills in 2022, the Term to Maturity for most of the 6-month T-bills are 182 days, with a couple at 181 days (e.g. BS22115F), and the 1-year T-bills are all 364 days.

What are the Median and Average Yields?

Median and average yields are different statistical measurements of central tendency. They are just FYI statistics provided to give a hint of the bidding distribution pattern, and they have no significance in the allotment.

The median yield is the middle yield in the ascending list of competitive bids. If the list has an odd amount of bids, the median yield is the yield right at the middle. If the list has an even number of bids, the median yield is the average of the middle pair.

The average yield is simply the average of the different yields in competitive applications.

Can Illustrate the Allotment Process by Example?

Let me use a hypothetical example to illustrate the allotment process:

In this example, the total amount offered/allotted is S$4.5 billion. Therefore, the 40% allotment cap to non-competitive applications is S$1.8 billion.

With a total S$2 billion applied for non-competitive, there is an over-subscription. The allotment ratio would be $1.8b/$2b = 90%, meaning all the non-competitive applicants would get partial allotment that is 90% of what they had applied, with random adjustments to ensure final allotments in multiples of S$1,000.

With S$1.8 billion allotted to non-competitive applications, the remaining S$2.7 billion would be allotted to competitive applications.

There are 8 competitive yield bids in this example. The yield bids are listed in ascending order, and the cumulative amount exceeds S$2.7 billion at 4.2% yield, i.e. the cut-off yield is determined to be 4.2%.

The balance amount available to the cut-off yield bidders after allotment to the lower yield bidders (cumulatively S$2.5 billion) would be $2.7b - $2.5b = S$0.2 billion. There are S$1 billion who bid at 4.2%, and the allotment ratio would be $0.2b/$1b = 20%. Hence, the 4.2% bidders would get partial allotment that is 20% of what they had applied, with random adjustments to ensure final allotments in multiples of S$1,000.

What is the Breakeven Yield for CPF Application?

Unlike Cash and SRS applications which have a negligible 0.05% p.a. opportunity cost, CPF opportunity cost is currently higher at 2.5% p.a. for OA and 4% p.a. for SA. Due to CPF interests are computed monthly based on the lowest balance of the month, you would forgo additional 1 or 2 months of CPF interests during the T-bill auction to maturity period.

For example, the T-bill issue BS22122Z is auctioned on 10 November 2022 and matures on 16 May 2023. When you succeed in getting some allotments, the discounted capital would be deducted from your CPFIA or SA soon after auction results are published, and the full face value would be returned to your CPFIA or SA on maturity. The whole auction to maturity period spans across 7 months (November 2022 to May 2023), resulting in you forgoing 7-month worth of CPF interests while earning 6-month worth of T-bill interests. That means you would need a higher T-bill cut-off yield than CPF interest rate to breakeven.

Some T-bill issues have their issue date cross over from auction month to the next month, e.g. the BS22121F issue has auction and issue dates on 27 October 2022 and 1 November 2022 respectively. This means that the auction to maturity period would span across 8 months (October 2022 to May 2023), and would need an even higher T-bill cut-off yield to breakeven.

The formula for computing the breakeven yield is given below:

• Breakeven Yield = CPF Rate x CPF Forgone Months / T-Bill Tenor Months

With current OA and SA interest rates at 2.5% and 4% respectively, the breakeven yields for various T-bills would be:

• 6-month T-bill spanning 7 months applied with OA: Breakeven Yield = 2.5% x 7 / 6 = 2.92%
• 6-month T-bill spanning 8 months applied with OA: Breakeven Yield = 2.5% x 8 / 6 = 3.33%
• 6-month T-bill spanning 7 months applied with SA: Breakeven Yield = 4% x 7 / 6 = 4.67%
• 6-month T-bill spanning 8 months applied with SA: Breakeven Yield = 4% x 8 / 6 = 5.33%
• 12-month T-bill spanning 13 months applied with OA: Breakeven Yield = 2.5% x 13 / 12 = 2.71%
• 12-month T-bill spanning 13 months applied with SA: Breakeven Yield = 4% x 13 / 12 = 4.33%

What are the Considerations for CPF Application?

A few things to consider for CPF applications:

• You would want to choose those T-bills with auction to maturity period that spans across only 1 additional month over the tenor in order to minimize the number of months with forgone CPF interests.
• You would want to choose those T-bills with auction and issue dates located near the middle of the month in order to give ample times for debit and credit to occur within the auction month and maturity month respectively.
• For CPFIS-OA application, the face value is returned to your CPFIA, not to your OA. You have to manually transfer the money in your CPFIA to OA within the maturity month through the internet banking portal of your CPFIS agent bank, or else you would end up forgoing more months of OA interests. You can set alarm on your mobile phone to remind you of this transfer on maturity month.
• Since there is a breakeven yield to compensate for the forgone CPF interests, you should submit a competitive bid with a yield premium above the breakeven yield. You decide what is the acceptable yield premium to make it worth your effort of visiting the bank branch in person and spending your precious time waiting in line for application processing.
• You should invest a sizeable amount for a decent gain in absolute dollars. Do realize that an 1% yield premium with S$10,000 investment on a 6-month T-bill is only going to give you a gain of about S$50 ($10,000 x 1% x 182 / 365 = S$49.86).

How to Confirm the Allotment Status?

There are several ways to confirm the allotment status of your T-bill applications:

• Based on the published auction results, you can work out the allotment amount, the upfront discount amount and the discounted capital for your application. You can tally these numbers with the refund amount in your CDP-linked bank account for cash application, the refund amount in your SRS account for SRS application, or the debit amount in your CPFIA or SA for CPF application.
• Some banks would notify you through SMS or email on the status of your application.
• After the issue date, check your CDP account, SRS account, CPFIA or SA for cash, SRS, CPFIS-OA or SA application respectively. The allotted T-bill would appear in these accounts in the form of units (e.g. 100 units for S$100,000 investment amount).

Reference Links

• T-bills: Information for Individuals
• Auctions and Issuance Calendar
• Buy SGS Bonds and T-bills at Auction: For Individuals
• How Auctions Are Conducted
• SGS Statistics - Auction Data