Describe how a T-bill auction runs and why every successful bidder ends up with the same yield.
Go to the MAS website and find the auction calendar for Singapore Government Securities. Leave it open as you read, because you'll keep coming back to it. You can't buy T-bills or SGS bonds over a counter at a set price. MAS auctions them on the Government's behalf and posts the schedule well before each sale.
Every issue listed on the calendar carries an announcement date, an auction date and an issue date. The announcement date is when MAS confirms the issue is going ahead. SGS bonds have one more date. The calendar lists a bond announcement date and then a separate, later size announcement date, when MAS states how much it plans to sell. That means you won't always know the amount on offer for a bond on its first announcement date. Check the MAS calendar for each issue's dates. The auction date is when bids are gathered and the price is fixed. The issue date is when the bills or bonds actually come into existence and your money is taken. Your holding shows up after the issue date.
Banks stop accepting bids before the auction, often a day or more before, because they need time to forward their customers' bids to MAS. Each bank lists its closing time on its T-bill page. Read it closely, as the time may differ depending on whether you pay with cash or CPF money. If you miss your bank's closing time, your next chance is the following auction, even when the auction date on the MAS calendar is still a few days away.
You can place one of two kinds of bid. A non-competitive bid takes whatever yield the auction ends up setting. MAS fills these first, up to a portion of the issue that MAS decides. A competitive bid states the lowest yield you are willing to accept.
Two colleagues, Arjun and Mei (an invented example), bid for the same six-month T-bill. Arjun left the yield field empty, so he had placed a non-competitive bid. Mei entered 3.00%, so hers counted as competitive. Once the results were out, the two of them had been allotted the identical yield, and it was above 3.00%. Mei thought her bank had slipped up in her favour. Nothing had gone wrong: by entering 3.00% she had said she would take any yield from 3.00% upwards, and because the cut-off landed above that, the higher rate is what she received. Lesson 4.3 sets the two bid types side by side in more detail.
Once the non-competitive portion has been allotted, MAS lines up the competitive bids in order of yield, starting with the lowest. Low-yield bids are served first since they cost the Government the least to borrow. MAS works up that list, filling each bid in turn, and stops when the amount on offer runs out. The yield of the final bid it fills becomes the cut-off yield. Any bid with a yield beneath the cut-off is filled completely. A bid sitting exactly on the cut-off may receive only part of what it asked for, when the remaining amount is too small to cover every bid at that level. A bid above the cut-off receives no allotment, and the money goes back to the bidder.
Suppose an issue is for S$100 million (all figures in this example are invented). Non-competitive bids come to S$30 million and are allotted before anything else. That leaves S$100 million - S$30 million = S$70 million for the competitive side, where four groups of bids have come in:
S$20 million at 3.00% S$25 million at 3.05% S$30 million at 3.10% S$40 million at 3.15%
Filling the 3.00% and 3.05% groups uses S$20 million + S$25 million = S$45 million, so S$70 million - S$45 million = S$25 million is still available. The 3.10% group wants S$30 million, which is more than the S$25 million remaining. Those bidders split the S$25 million between them, and each gets about 83% of the amount they bid for (S$25 million / S$30 million). The cut-off yield is therefore 3.10%. The 3.15% group gets nothing.
Everyone who was allotted anything earns 3.10%: the non-competitive bidders, the bidders at 3.00% and 3.05%, and the 3.10% bidders who were only partly filled.
SGS auctions use a format called a uniform-price auction, in which every allotted bidder in an issue gets the same yield and pays the same price. When you place a competitive bid, the yield you enter is your floor, and what you actually receive is the cut-off. A low bid leaves you no worse off, since you get the cut-off regardless of the number you typed. Its only effect is to raise your odds of being filled. Mei's 3.00% bid worked this way, which is how she ended up level with Arjun.
Because the number you enter affects whether you are filled and has no bearing on the yield you are paid, the format gives you a reason to bid honestly. For a competitive bid, enter the lowest yield you would genuinely be content with.
MAS publishes results after each auction, listing the cut-off yield, the amount offered, the amount allotted, and how heavily the issue was bid. The T-bill results stretch back years, and they are the most useful thing to look at before you place a bid. From them you can see the band in which recent cut-offs have fallen and how far the cut-off tends to shift from one auction to the next. They also show the auctions where demand was heavy, which gives you a sense of how likely a non-competitive bid is to be filled in full.
They cannot tell you where the next cut-off will come out. Yields rise and fall with the wider rate market, which is covered in "How the economy hits your wallet: rates, inflation and cycles".
Arjun went back through the last few six-month auctions and found the cut-off had shifted only slightly each time. Knowing that made it easier for him to decide which type of bid to use, and the next lesson walks through that decision.
Your own preparation follows the same order. First, check the range of recent cut-off yields in the MAS results and how much they have moved. Next, see how heavily recent issues were bid. Then find the next auction date on the MAS calendar. Last, go to your bank's T-bill page and find its closing time for that auction and for the funding source you plan to use.
Look up the same results Arjun did, then note the next auction date and your bank's closing time for it.
Look up the last three cut-off yields for the six-month T-bill on the MAS website. Write down the next auction date and your bank's closing time for applications.
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