Collectively, we have over $580 billion in our CPF accounts – of which, nearly $182 billion is in our CPF Ordinary Account (OA). On top of this, we’re constantly adding to our CPF savings through monthly contributions from our salaries. Understandably, Singaporeans would want to maximise the returns on their CPF savings.
One way we can maximise the returns on our Ordinary Account (OA) savings is by investing in higher-yielding Treasury Bills (T-bills), rather than leaving our OA funds to earn the floor 2.5% interest per annum (p.a.). The latest Singapore Government T-bills, auctioned on 4 July 2024 had a cut-off yield of 3.7%. This presents a unique “risk-free” opportunity to earn higher returns on our CPF OA savings.
Treasury Bill (T-Bills) Are Giving Up To 3.7% Yields And Are Backed By The Singapore Government
T-Bills are short-term government securities (or bills) that are issued on either a 6-month or a 1-year tenor. The T-bills are considered to be a risk-free investment as they are backed by the Singapore government and have very short tenures. Besides investing in T-bills in cash, we can invest in T-bills under the CPF Investment Scheme (CPFIS) using our OA and SA savings upon setting aside $20,000 and $40,000, respectively.
The latest BS24113N 6-Month T-bill had a cut-off yield of 3.7%. The 6-month T-bill is issued every two weeks, while the 1-year T-bill is issued every four months. You can check the latest T-bill auction from MAS’s Auctions And Issuance Calendar 2023.
Read Also: Treasury Bills (T-bills): What Are They And How You Can Buy Them
Earn Higher Interest On Your CPF OA Savings (Without Taking On More Risks) By Investing In T-Bills
It’s no secret that interest rates are currently at elevated levels. Yet, the 3-month average of major local banks’ interest rates has remained stubbornly low at 0.45%, which continued to suppress our CPF OA rates at the legislated minimum rate of 2.5% for 1 July 2024 to 30 September 2024.
Previously, in a low interest rate environment, the floor rate was attractive as it was much higher than the rates on government securities like T-bills and SGS bonds. However, in the current inflationary and elevated interest rate environment, the 2.5% floor rate is no longer as appealing as we can simply invest in T-bills for higher returns.
For example, using the BS24113N 6-Month T-bill as a reference, we could easily earn an additional 1.2% p.a. on our investable OA savings. For someone with $100,000 in OA savings, they can invest only $80,000, as they have to maintain a minimum of $20,000 in their OA. Investing this $80,000 in the T-bills would have earned us $2,960 a year, compared to just $2,000 keeping it in the OA.
Read Also: What Would It Take For CPF Interest Rates To Increase Beyond 2.5% (For OA) And 4.0% (For SA and MA)
Should We Invest In 6-Month or 1-Year T-bills Using Our OA Savings?
It is natural to assume that a 1-Year T-bill would be more advantageous compared to a 6-month T-bill as there is a lower reinvestment risk when the bill matures. However, we also have to consider that investing in T-bills is an arbitrage opportunity rather than a long-term strategy.
The CPF OA rates are reviewed every quarter, and if the interest rates are revised higher next year, we might choose to leave our money in our OA account. The shorter-term 6-month T-bill would keep our hedging risk lower compared to the 1-Year T-bill.
We are still in an elevated interest rate environment today, there is a strong indication that the US Central Bank (Federal Reserve) may lower short-term rates by 4Q 2024. If we subscribe to this, we can opt to invest our funds in the 1-year T-bills as opposed to the 6-month T-bills, which will mature earlier and offer lower rates after 4Q 2024.
While everyone may have varying needs, our OA funds can generally be used to meet our short-term expenditure needs like housing. Having our investments in a shorter-term T-bill would give us better flexibility in the use of our funds as opposed to a longer-dated T-bill, which may incur capital losses if we were to sell/redeem before its maturity.
For many reasons, a 6-month T-bill would better suit our purpose. Moreover, 6-month T-bills are also issued every two weeks while the 1-year T-bills are issued every 3 months. We want to start earning a higher interest rate sooner with the 6-month T-bills rather than waiting for the next 1-year T-bills issuance. Even if our preference is the 1-year T-bills, we may be losing interest rate returns while waiting for the next issuance.
Read Also: Investments To Make With CPF OA and SA Funds When Doing The CPF Shielding Hack
How Much Do T-bills Cost To Apply Using CPF OA?
The minimum investment amount in the T-bills is $1,000 and subsequent investments are in multiples of $1,000. You would incur two types of charges when applying for T-bills using your CPFIS.
The first is the transaction charge of $2.50 for each transaction, which includes every purchase, sale and interest received. The second is the service fee charge of $2 (plus GST) per counter per quarter. This fee is levied for the maintenance of the account for the services rendered.
For example, if you were to purchase $1,000 in T-bills using your CPFIS at the next issuance, you would have to pay around $6.50 in charges (which includes $2.50 in transaction fees upon purchase and $4 in service fees over at least two quarters).
Read Also: 7 Types Of Investments You Can Make Using Your CPF OA Monies Via The CPFIS-OA
Illustration: Investing $10,000 Using CPFIS-OA In The 6-Month T-Bill At 3.7% Per Annum
Assuming we were to invest $10,000 using our CPFIS-OA in the latest BS24113N T-bills, which has a cut-off yield of 3.7% p.a. as our reference.
Simple Calculation:
By investing $10,000 in the 6-Month T-bill at $98.155, we would earn an interest of $184.50 at the end of 6 months.
While keeping $10,000 in our CPF OA at 2.5%, would earn us $125 at the end of 6 months.
The difference is earning $59.50 more by investing in the T-bills. For every $10,000 of our OA savings that we can invest in the 6-month T-bills, we can earn $59.50 more every 6 months – or $119 more each year. While this may not seem like a lot of money, if we are able to invest $100,000 of our OA savings, we can earn $1,190 more each year.
Realistic Calculation:
In reality, the interest earned might differ due to how the CPF interest is computed and credited into our accounts. This is because our CPF interest is computed monthly and compounded annually.
For instance, CPF contributions received in our accounts this month would only start earning interest next month, whereas, the withdrawals made this month, will not earn any interest from this month onwards.
This implies that there is an additional opportunity cost when investing in our CPF-OA as the money withdrawn this month, will not earn any CPF interest from this onwards till the month after the money is contributed back to our account.
Back to our calculation, there is no change in the interest received from the 6-month T-bill. However, for the CPF interest, we now have to factor in the opportunity cost and the transaction costs.
BS24113N 6-Month T-bill Issue Details
Announcement Date
27 June 2024
Auction Date
4 July 2024
Issue Date
9 July 2024
Maturity Date
7 Jan 2025
Based on the BS24113N 6-Month T-bill, we would not receive any CPF-OA interest for the amount invested from July 2024 till January 2025. That’s a total of seven months of lost interest on our OA savings. This equals a total OA interest lost of around $145.80 (rather than $125 for 6 months).
Next, if we were to add the $6.50 in transaction and service fees for buying using our CPF-OA, it would bring a total opportunity cost of $152.30.
So, the realistic difference between investing our OA savings in the latest T-bills versus keeping it in our OA would only be around $32.20 more. Although lower than our initial calculation, it is still a positive arbitrage opportunity if interest rates continue to rise. Of course, the amounts will feel more significant if we are investing much more than $10,000.
Read Also: Singapore Treasury Bills (T-bills): What Is Cut-Off Yield, Median Yield, And Average Yield
How To Use CPF To Apply T-bills At Primary Auctions?
To apply for T-bills using our CPF, we would need to have a CPFIS, and we can only apply through our CPFIS agent bank (i.e. DBS, OCBC or UOB). We can apply online, via internet banking.
Also, note that the cut-off date for applications using our CPFIS closes two days before the auction. For example, the next auction is for the BS24114V 6-Month T-bill, which closes on 18 July 2024. However, if we intend to invest via your CPFIS-OA, we would need to apply slightly earlier, by 16 July 2024, 12pm. If we intend to apply at the last minute, we may want to check with the respective banks on the cut-off timing for applications. Applying slightly earlier will not make a difference for the interest rates that we can earn in our OA as we would lose it for the entire month of July.
Read Also: Beginners’ Guide To Start Investing Using The CPF Investment Scheme (CPFIS)
This article was first written on 14 October 2022 and has been updated with the latest information.
The post Why Every Singaporean Should Apply To Invest Their OA Funds In T-Bill appeared first on DollarsAndSense.sg.