You will be able to choose a bid type based on whether you care more about the yield or about getting the bill.
Arjun wants to put S$20,000 into a six-month T-bill, and his bank app stops him with a choice between a competitive and a non-competitive bid. On the forum he checks, half the posters bid a precise yield every time and the other half think that is a waste of effort. Each side is describing a real trade-off. Which bid suits you comes down to whether you care more about the yield or about getting the bill.
A non-competitive bid says: give me the bills, at whatever cut-off yield the auction sets. You do not name a number.
As lesson 4.2, How the auction sets one yield for everyone, showed, non-competitive bids are filled before any competitive bid, up to a share of the issue that MAS sets. The current share is on the MAS website. On most auctions, that share is enough to cover every non-competitive bid in full, and you get exactly what you asked for at the cut-off.
The catch comes when non-competitive demand is heavy. If the total of non-competitive bids exceeds the share set aside for them, MAS allots them pro rata. Everyone gets the same fraction of what they asked for.
Here is a made-up example. The issue is S$100 million and the non-competitive share is S$40 million. Non-competitive bids come to S$80 million, twice the share. Each bidder receives half their amount. Arjun's S$20,000 bid would be filled at S$10,000, and the other S$10,000 would be returned to him to place somewhere else. Allotments are in set multiples, so the actual figure is rounded according to MAS's rules.
That is the trade. You never miss out on the yield, but in a busy auction you might get less than you wanted.
A competitive bid names the lowest yield you will accept. The rules from lesson 4.2 then decide your fate. If your yield is below the cut-off, you are filled in full and receive the cut-off yield, which is higher than you asked for. If it is exactly at the cut-off, you may be filled in part. If it is above the cut-off, you get nothing.
That last outcome is the real cost. Suppose Arjun bids 3.30% because he hopes for a good rate, and the cut-off comes out at 3.10%, so his bid is above it and he receives no bills. His S$20,000 comes back and sits in his savings account until the next auction, earning very little, unless he has a backup plan. For a six-month bill, the next auction is usually a couple of weeks away, but a missed one-year bill can mean a longer wait.
So a high bid is a gamble. If the cut-off comes out above your bid, you are filled and gain nothing extra, because you get the cut-off anyway. If it comes out below your bid, you get nothing. Bidding high never raises the yield you receive. It only decides whether you are in or out.
Bidding a specific yield makes sense in one situation: you would genuinely rather keep your money elsewhere than accept less than a certain rate. Perhaps a fixed deposit offer at 3.20% is open to you for the same term, and a T-bill below that is not worth the effort. Then a competitive bid at 3.20% does exactly what you want. If the auction clears above it, you get the T-bill. If not, you take the deposit.
Without a clear alternative like that, most retail bidders gain little from guessing. The cut-off is set by large institutional bids, and a small bid at a precise yield does not move it.
Some people place a competitive bid at a yield well below recent cut-offs. Because competitive bids below the cut-off are filled in full, this can avoid the pro rata cut that non-competitive bids face in a busy auction, while still paying the cut-off yield. The risk is that the cut-off itself comes out lower than you expected, and you are filled at that lower yield, as you would have been with a non-competitive bid. Check recent results before relying on this, and make sure you understand your bank's bid form.
Put it as two questions. Do I mainly want to be sure of getting bills, and am I happy with whatever the market yield is? Then a non-competitive bid fits, with the small risk of a partial fill. Do I have a clear yield below which I would rather do something else with the money, and a ready alternative? Then a competitive bid at that yield fits.
Arjun had no other offer he preferred, and if only part of his bid were filled, the rest could wait in his savings account for the next auction, so he went with a non-competitive bid. Write your own version now: a situation where each bid type would suit you, and the one you would pick for your next application.
Write one sentence for each bid type describing a situation where you would choose it, then pick the type for your next application.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).