Beginner's guide to Singapore Treasury bills for individual investors 2023: What are T-bills and how to apply

Let me guess, you're furiously searching up 'Treasury bills' or 'T-bills' because:

• You keep seeing news on T-bills and its yields and have absolutely no idea what's going on.
• You're realising the world is a little nuts and the tried-and-tested investments you used to rely on may not be so profitable anymore.
• You're wondering if T-bills is related to T-Pain.

Nope, T-bills isn't T-Pain's son or cousin. But it could be your new best friend if you're looking for a low-risk investment to diversify your portfolio with.

In this article, we answer 10 questions that you might be too shy to ask as a T-bills beginner. After which, you should be able to decide if T-bills will make a good addition to your investment portfolio.

What are T-bills?

Treasury bills, or T-bills for short, are short-term Singapore Government Securities (SGS).

If you didn't understand a word of what I just said, the main things to know are that:

• They're securities you can invest in
• They're issued by the government
• You will hold on to them for a relatively short duration

If T-bills sound a bit like bonds to you, know that the two types of securities do share some similarities, but operate quite differently.

So, how do T-bills work for you, the investor?

T-bills pay out a fixed interest rate. This interest will be the yield that you, the investor, earn.

One big difference between T-bills and bonds is when and how you receive your interest.

With bonds, you receive interest payments every six months. However, with T-bills, the mechanism is very different.

When you buy a T-bill, you get a discount off the sticker price. When your T-bill reaches maturity (at the end of its six-month or 1-year tenor), the Singapore government will pay you back its full value.

So, what you earn is that discount you got at the start, which should also be equivalent to the T-bill's interest.

To give you an idea of how much you can earn, the benchmark yield of six-month T-bills is 4.04 per cent as of Jan 19, 2023. You can check the latest benchmark yields here.

Example time! Let's say you buy $1,000 worth of six-month T-bills offering an annual interest rate of four per cent.

Four per cent p.a. interest on $1,000 over a period of six months is $20. Therefore, your discount will be $20 (four per cent x $1,000 / 2).

You'll thus pay $980 for the T-bills. When they reach maturity in six months' times, you'll get back $1,000. Your net profit will be $20.

Why is the government offering T-bills?

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Like bonds, T-bills give the government a way to raise money for its spending needs. When you buy a T-bill, you're giving a "loan" to the government that they will later pay back with interest upon maturity.

The government's sale of T-bills also serves the following purposes.

First, it helps to foster a liquid SGS market and keep it robust. The SGS market produces a government yield curve, which is then used as a benchmark for the corporate debt market.

Secondly, bonds and T-bills help foster a secondary market for cash transactions and derivatives, which is important for risk management.

Finally, bonds and T-bills offer a way for investors to participate in the Singapore market.

None of this information is really necessary in order to start buying your first T-bills and making money from them, but it's nice to know how exactly your money is affecting the world.

What's the difference between SGS bonds, T-bills, and Savings Bonds?

How are T-bills issued?

T-bills are issued via an auction process. If you've ever attended a Hungry Ghost Festival banquet dinner or binge watched reality series Auction Hunters on Amazon Prime, you already know the deal.

In an auction, there is an element of competition as potential buyers might choose to place competitive bids in hopes of outdoing their competitors. This is more suitable for institutional investors or those who know what they're doing.

But thankfully, for regular folks, there's the much easier option of placing a non-competitive bid. Here's the difference between the two:

a) Non-competitive bid

To submit a non-competitive bid, you only have to specify the amount you wish to invest, not the yield.

Non-competitive bids get allotted first and will receive up to 40 per cent of the total amount of T-bills being issued. If the 40 per cent allotment is exceeded, you will be allocated bonds on a pro-rated basis.

b) Competitive bid

If you wish to put in a competitive bid, you'll have to indicate the minimum interest rate you're willing to accept.

Yields are indicated in percentage terms, up to two decimal places. You can submit more than one competitive bid. Competitive bids are allotted after non-competitive bids, beginning from the lowest to highest yields.

What's happening now?

At the time of writing, the auction for the latest six-month T-bill just closed on Jan 18, 2023. There's an upcoming one-year T-bill due to drop on Jan 26, 2023, and a six-month T-bill opening on Feb 2, 2023.

How risky are T-bills?

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T-bills are considered very safe investments as they are backed by the government.

The Singapore government has a Standard and Poor (S&P) credit rating of AAA-the highest possible rating. This basically makes it the teacher's pet in terms of credit-worthiness.

No investment is 100 per cent risk free, as an apocalypse or alien invasion could wipe out any economy in a second. But in the world as we know it today, the Singapore government has an extremely low chance of defaulting.

So, the possibility that you'll lose the money you've invested in T-bills is pretty small.

Are T-bills right for me? They are, if…

… you are looking for a low-risk investment to diversify your portfolio with, T-bills are a good contender.

You'll receive a fixed interest payment upon maturity at the end of a six-month to one-year long tenor, so T-bills are great if you're looking for a safe, short-term investment option with a decent yield.

Who can take part?

So long as you are an institution or a human being aged at least 18 and not an undischarged bankrupt, you can invest in Singapore T-bills, regardless of residence or nationality.

Cool. So, what do I need to start?

To invest in T-bills, you first need an account with DBS/POSB, UOB or OCBC, as well as a Central Depository (CDP) account.

You then need to decide whether you wish to invest your cash, CPF savings or Supplementary Retirement Scheme (SRS) savings.

To invest your cash, you can simply apply to bid for T-bills at an ATM machine or through your internet banking account. There is a $2 transaction fee for all banks except DBS, which waives it.

In the case of CPF savings, you also need to apply to invest your Ordinary Account (OA) and/or Special Account (SA) savings through the CPF Investment Scheme.

If you're investing SRS savings, you'll need to first apply to use them through the bank administering your SRS account.

The minimum bid amount is $1000, and you can buy your T-bills in multiples of $1,000.

What if you make an unsuccessful or invalid bid? Don't worry, the money will be refunded to the account you used to make the application one or two business days after the auction.

If you plan to apply through ATM or internet banking, be aware that application via these channels may close one or two business days before the auction.

What do I do when I'm done with T-bills?

So, you've bought your T-bills. Congrats! So, what do you do with them?

You can wait for them to reach maturity to collect the full value. In that case, you would earn a yield equivalent to the advertised interest rate. Unlike bonds, you cannot redeem your T-bills.

Alternatively, you can try to sell them on the secondary market before maturity through DBS/POSB, OCBC and UOB.

However, not many are buying T-bills on the secondary market, so there is no guarantee you'll be able to find a buyer before maturity.

That's it, you're all set.

ALSO READ: UOB One Savings Account raises interest rates to 7.8%: Should you save or invest?

This article was first published in MoneySmart.