Projection of T-Bills Cut-Off Yield

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2022/11/15/projection-of-t-bills-cut-off-yield/

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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One popular question raised in the financial community is that many people are seeking opinions from others on where the cut-off yield is going with the upcoming T-bills. Presumably they are trying to gauge the market sentiment that will help them in deciding whether to apply for T-bills and the bids they want to submit.

Let's take a look at 2 methods of yield projection in this blog post.

MAS Bills to T-Bills Projection

In the 1M65 Telegram community, one member (@volatilitytrader88) suggested forecasting the cut-off yield of the 6-month T-Bills based on the preceding 12-week MAS Bills auction results.

MAS Bills are the shorter tenor bills meant for institutions only. Currently MAS issues 4-week and 12-week MAS Bills, and the frequency of issuance is weekly. Everything else are very similar between MAS Bills and T-Bills.

You can find 12-week MAS Bills with auction date about 1 to 3 days before that of the 6-month T-Bills. The recency of MAS Bills auction results provide a good indication of the institution sentiments on yield. With the institutions being the main players also in T-bills, the cut-off yield would likely not deviating too much from the MAS Bills' yield.

Here I tabulated the 12-week MAS Bills and 6-month T-bills in 2022 side-by-side, computed the yield delta between the 2 bills and a few statistical data (maximum, minimum, average, standard deviation, and +1/-1SD) for YTD data:

The average yield delta (T-bills minus MAS bills) is 0.07%. With a standard deviation (SD) of 0.19%, it means the T-bills cut-off yield could be within the 1 SD range of -0.12% to +0.25% from the preceding MAS bills' yield.

Linear Trendline Projection

In my blog post on SA Shielding using T-Bills, I used the linear trendline projection feature in Microsoft Excel to plot the T-bills cut-off yield chart:

Of course the rationale for this projection is that the cut-off yield is likely going to continue trending up in a linear fashion as long as the US Federal Reserve continues with its aggressive rate hikes.

How Reliable are the Projection?

As you can see from my analysis of the BS22122Z T-bill issue, there are many factors that could affect the auction outcome. In fact, the BS22122Z T-bill cut-off yield had the greatest deviation from the preceding MAS bills, and the earlier BS22121F T-bill cut-off yield was about the furthest away from the trendline.

No projection can be perfect, therefore we should take any such projected yield with a grain of salt. More importantly, we should make our bidding decision based on what we want to achieve, not what we hope the market would give us.