CPF remains a key pillar of Singaporeans’ retirement security. This is evidenced by the record voluntary cash top-ups of around $3.5 billion made by over 200,000 CPF members in the first three quarters of 2022.
Understandably, most Singaporeans would want to maximise the returns on their savings. One way is by making cash top-ups to their or loved ones’ Special Account (SA) or Retirement Account (RA), which yield as high as 5% and 6% per annum, respectively.
But now, we can also maximise the returns on our Ordinary Account (OA) savings by investing in the higher-yielding Treasury Bills. With the latest T-bills auctioned in October 2022 yielding above 3.7%, it presents a unique opportunity to earn higher returns on our CPF OA savings.
Treasury Bill (T-Bills) Are Giving Up To 3.77% Yields And Are Backed By The Singapore Government
First, what are Treasury bills?
Treasury bills (or T-Bills in short) 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 low-risk investment as they are backed by the Singapore government. 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 BS22120E 6-Month T-bill issuance and the BY22103A 1-Year T-bill issuance had a cut-off yield of 3.77% and 3.72%, respectively.
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 2022.
Read Also: Treasury Bills (T-bills): What Are They And How You Can Buy Them
Earn 1.22% More Interest On Your CPF OA By Investing In T-Bills
It’s no secret that interest rates are rising globally because of the United States’ hawkish policy on interest rates to arrest its high inflation. Yet, the 3-month average of major local banks’ interest rates has remained at 0.09%, thereby keeping our CPF OA rates at the legislated minimum rate of 2.5% for 1 October 2022 to 31 December 2022.
Previously, in a low interest rate environment, the floor rate was attractive as it was higher than the rates on government securities like T-bills and SGS bonds. However, in the current inflationary and rising interest rate environment, the 2.5% floor rate is no longer as appealing as we can invest in T-bills for higher returns.
For example, using the BY22103A 1-Year T-bill for easy reference, we could earn an additional 1.22% [3.72%-2.5%] p.a. on our investable OA amount.
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 low 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 were revised higher next year, we might even choose to leave our money in our OA account. Choosing to invest in a 6-month T-bill now with a maturity date in 18 April 2023, would only mean an opportunity cost of 3-months if the CPF OA rates are revised for 1 January 2023 to 30 April 2023. The shorter-term 6-month T-bill would keep our hedging risk lower compared to the 1-Year T-bill.
Moreover, in a rising interest rate environment, particularly as the US Central Bank (Federal Reserve) intends to raise interest rates to above 4% from the current 3%–3.25%, a shorter-term T-bill would enable us to reinvest at higher rates.
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 us capital losses if we were to sell/redeem before its maturity.
Therefore, a 6-month T-bill would better suit our purpose to take advantage of the higher yields from the T-bills as it is issued more frequently (every two weeks) compared to the 1-Year T-bill, which is issued once every quarter.
Read Also: Investments To Make With CPF OA and SA Funds When Doing The CPF Shielding Hack
Maximise The Higher Interest Rates On Our Combined CPF Balances First
Before we invest our CPF OA in T-bills, we should maximise the returns on our combined CPF balances first. CPF members below 55 years old can earn an extra 1% interest or up to 5% on the first $60,000 of their combined balances (capped at $20,000 for OA).
Similarly, CPF members aged 55 and above can earn up to 6% interest on the first $30,000 of their combined CPF balances and up to 5% on the next $30,000.
Saving or retaining at least $60,000 in our CPF accounts would allow us to optimise our savings without additional effort.
Read Also: CPF MediSave Top-Ups Or Special Account Top-Ups. Which Makes More Financial Sense?
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 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 3.77% Per Annum
Assuming we have set aside $60,000 to earn the higher CPF interest rates, let’s look at how much more interest we would earn if we were to invest $10,000 using our CPFIS-OA in the T-bills.
We will use the BS22120E 6-Month T-bill, which has a cut-off yield of 3.77% p.a. as our reference.
Simple Calculation:
By investing $10,000 in the 6-Month T-bill at $98.12, we would earn an interest of $188 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 $63 more by investing in the T-bills.
Realistic Calculation:
But, in reality, the interest earned might differ due to how the CPF interest is computed and credited into our accounts. As we may know, our CPF interest is computed monthly and compounded annually. For instance, the 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.
| BS22120E 6-Month Issue Details | |
| Announcement Date | 06 October 2022 |
| Auction Date | 13 October 2022 |
| Issue Date | 18 October 2022 |
| Maturity Date | 18 April 2023 |
Based on the BS22120E 6-Month, we would not receive any CPF-OA interest from this month, October 2022 till April 2023. That’s a total of seven months of lost interest on our OA savings. This equals a total interest earned of around $145.80.
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 would only be around $35.70 more. Although lower than our initial calculation, it is still a positive arbitrage opportunity if interest rates continue to rise.
How To Use CPF To Apply T-bills At Primary Auctions?
To apply for T-bills using your CPF, you would need to visit any branch of the CPF Investment Scheme (CPFIS) bond dealers (i.e., DBS, OCBC, or UOB). Unlike for cash and supplementary retirement scheme (SRS) applications, you will not be able to apply online.
Also, the cut-off date for applications using your CPFIS closes two days before the auction. For example, the next auction is for the BS22121F 6-Month T-bill, which closes on 27 October 2022. However, if you intend to invest via your CPFIS-OA, you would need to apply by 25 October 2022, 12pm.
Read Also: Beginners’ Guide To Start Investing Using The CPF Investment Scheme (CPFIS)
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