Yields on six-month T-bills hover around the 4% levels while one-year T-bill plays catch-up

Six-month T-bill yields have been on a steady decline, but some experts feel it has reached its floor for now. PHOTO: THE NEW PAPER FILE

SINGAPORE – Yields continue to fall for six-month Treasury Bills (T-bills) as the upward pressure on interest rates eases.

The yield at Wednesday’s auction came in at 4 per cent. That is down from 4.2 per cent on Jan 5, 4.28 per cent on Dec 21, and the 30-year high of 4.4 per cent in the Dec 8 auction.

It has been a steady decline but some experts feel it has reached its floor, for now at least.

All eyes will now be on whether yields for one-year T-bills are more resilient.

The most recent auction – on Oct 13 – gave investors a yield of 3.72 per cent but some analysts expect this will go higher at the auction on Jan 26 based on recent benchmark yields in financial markets.

While Wednesday’s auction of six-month T-bills continued the trend of falling yields, demand remained healthy, even with the offer size increasing by $300 million from the Jan 5 issue.

There were just over $13 billion worth of applications for $5 billion of T-bills – a subscription rate of 2.61, indicating $2.61 applications for every dollar offered,. That rate was up slightly on the 2.56 figure recorded on Jan 5.

DBS Bank’s senior rates strategist, Mr Eugene Leow, said yields for T-bills could be limited by the expectation that the US Federal Reserve may be close to the end of its cycle of interest rate hikes.

Mr Lim Teng Chong, senior research analyst for global fixed income at Bondsupermart, noted that the strengthening Singapore dollar could also have contributed to the recent fall in yields.

A rising Singdollar makes the currency relatively more attractive than the US dollar.

Interest rates for the greenback will have to be relatively higher to compensate holders who could have switched into the Singdollar.

However, Mr Lim and Mr Leow do not expect yields on six-month T-bills to go below 4 per cent. Mr Leow said it is difficult to envisage a sustained fall in T-bill rates unless the US Fed changes its mind and starts cutting interest rates in 2023.

The US central bank raised rates by 4.25 percentage points to the 4.25 to 4.5 per cent range in a series of hikes in 2022. It expects to raise rates further and then keep them at a high level throughout 2023, before cutting in 2024.

If the US Fed hikes to around 5 per cent and stays at that level, Bondsupermart said there is still some room for six-month T-bills to go higher.

Mr Lim expects the yield to range between 4.5 and 4.6 per cent in 2023. But he added that it is unlikely yields will hit or surpass the high of 4.73 per cent reached in September 1988 because of the weakening dollar and still healthy demand for six-month T-bills.

The one-year T-bill rates are also expected to go up on Jan 26.

Six-month T-bills are issued every two weeks, while one-year T-bills are issued every three months.

The one-year T-bill started below 1 per cent in Jan 2022 before going past 3 per cent in July and hitting 3.72 per cent in October.

Bondsupermart’s Mr Lim expects the one-year T-bill to range between 4.2 and 4.4 per cent in next week’s auction but does not envisage them hitting 4.8 per cent, the record high in August 1991.

Ms Lorna Tan, head of financial planning literacy at DBS Bank, said the six-month T-bill is offering a higher rate of return compared to the one-year T-bill so it may make more sense to invest in these.

She added that investors could consider the longer-term T-bills if they intend to lock-in their returns for a longer period.

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