Projection of 6-Month T-Bills Cut-Off Yield in 2024

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2024/01/22/projection-of-t-bills-cut-off-yield-in-2024/

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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I wrote a blog post on the Projection of T-Bills Cut-Off Yield in November 2022. In that article, I introduced 2 methods of yield projection:

• MAS Bills to T-Bills Projection
• Linear Trendline Projection

Let's take a look at how these 2 methods are doing with the T-bills auction results up till this month.

MAS Bills to T-Bills Projection

In the blog post on 6-Month T-Bill Auction Trend in 2022 and 2023, I have already presented the T-Bill vs MAS Bill Yield Chart and the T-Bill Yield Premium Statistics in 2022 and 2023. Here is an updated chart and table including the January 2024 T-Bill and MAS Bill auction results:

This method of projection should continue to work as it was capturing the deviations due to retail investors' biddings on T-Bills from the institutions' biddings on the immediately preceding MAS Bills.

The advantage of this method of projection is that the actual yield should be quite close to the projected yield as the institutions' bids is likely to be stable across the 2 bills happening within 2 days. The disadvantage is that the projection is limited to the next T-bill issue, and not able to project yields for subsequent T-bill issues until the corresponding MAS bills auction results are released.

Trendline Projection

The trendline projection method can project further into future T-bill issues, but the further it is, the less predictive it will probably be.

The Linear Trendline Projection worked reasonably well in 2022, but it would have failed in 2023 as the yield no longer went through a linearly increasing trajectory, but instead flatten in a narrow range. We need to change the trendline projection method from linear to higher order.

By experimenting with various trendline options in Excel, I found that the 3rd Order Polynomial Trendline Projection seems to work quite well from 2022 to January 2024.

Based on this trendline projection, the 6-Month T-Bill Cut-Off Yield might hover around 3.50% to 4.00% in 2024. This might change when US Federal Reserve pivots to rate easing. The current CME FedWatch Tool (as of 22 January 2024) is showing high probability of rate easing starting from May 2024:

I shall update the polynomial trendline projection chart to see how well this method turns out to be in subsequent months till