6-month T-bill vs. 1-Year Treasury Bill: Know the Difference and Choose the Right Solution (2023)

Due to the recent increase in interest rates, domestic investors have increased their demand for T-bills or T-bills for short. These short-term debt instruments issued and backed by the Singapore government provide a safe investment option to store excess savings. Treasury bills come in two maturities: 6 months and 1 year.

When investing in treasury bills, whether in cash, in the supplementary pension insurance system (SRS) or in the insurance fund investment program (CPFIS), the choice of maturity is crucial. This affects not only the return you will receive, but also the risks associated with your investment.

While it may be tempting to lock in a longer-term rate as recent 6-month Treasuries approach 4% (annualized), it's important to understand the difference between the two maturities before settling on the right option.

Also read:Treasury bills: What they are and how to buy them

Maturity and maturity

The main difference between 6-month and 1-year T-bills is the maturity or maturity of the debt instrument. As the name suggests, 6-month T-bills have a maturity of 6 months, while 1-year T-bills expire one year after issuance.

Which of the two you choose depends on your investment goals and liquidity needs. For example, if you want to maximize your return on short-term expenses such as wedding expenses, home renovations or year-end travel, a short-term 6-month T-bill may be ideal. On the other hand, if you are investing your savings for the long term and do not need the savings immediately, a longer-term one-year T-bill provides greater certainty of return on investment.

return on investment

The maturity of a debt instrument can also affect the yield or return on investment. Typically, bonds with longer maturities tend to have higher interest rates than bonds with shorter maturities, given the same conditions. This is to compensate investors for taking on the higher interest rate risk associated with longer bonds.

However, short-term bond yields are currently higher than longer-term bond yields due to the Federal Reserve's hawkish interest rate policy this year. The relationship between a bond's yield and maturity is described by the inverse yield curve below.

source:of world government bonds

This means that the yield on 1-year T-bills may be lower compared to 6-month T-bills. The difference in yield can be seen by looking at historical monthly returns since 2022.

According to the two tables above, the rate on the 1-year government bond in early 2022 is slightly higher than the rate on the 6-month government bond. But as of September 2022, the 6-month government rate has fallen. Still higher than one-year Treasury bills. Currently, the 6-month Treasury rate is about 20 basis points higher than the 1-year rate.

From an investment return perspective, investing in short-term government bonds maximizes your return as long as short-term interest rates are higher than long-term interest rates.

investment risk

There are different types of risk involved in investing in any investment vehicle, including Treasury bills. However, since government bonds are backed by the Singapore government with the highest credit rating, we can assume little or no credit or default risk. However, like any other debt instrument, Treasury bills are subject to interest rate risk and reinvestment risk.

Interest rate

In contrast to the relatively benign interest rate environment of the past decade, we are experiencing greater volatility as central banks around the world raise interest rates to curb high inflation. Long-term bonds, which are more sensitive to changes in interest rates, may therefore be exposed to interest rate risk due to the inverse relationship between interest rates and bond prices. This means that if interest rates rise, T-bill prices will fall, affecting investors who sold T-bills before maturity.

In this case, the shorter 6-month T-bill may be the preferred choice, since the shorter maturity offers less interest rate risk. However, this may not be a problem if you intend to hold the T-bill to maturity.

reinvestment risk

Likewise, interest rate fluctuations expose investors to the risk of reinvestment, the risk of having to reinvest earnings at a lower interest rate than previously invested. In a falling interest rate environment, a longer 1-year T-bill can reduce reinvestment risk compared to a shorter 6-month T-bill because it locks in interest rates for a longer period of time. In contrast, short-term 6-month T-bills allow you to reinvest at a higher rate in a rising interest rate environment than long-term T-bills, which lock you into a lower interest rate.

Choosing between these two government bonds depends on your outlook for short-term interest rates. Treasury bills allow you to reinvest your money for a higher return if you assume interest rates will rise in line with the Fed's expectations (at least the Fed predicts that)two more campaignsBy the end of this year.

On the other hand, if you accept the view of most economists, who predict that interest rates have peaked and are likely to decline from now on, then you maximize your potential return by locking in the current interest rate on long-term Treasuries.

Also read:If you invest your special CPF account in treasury bills now, how much interest will you earn?

Frequency of issuance

Finally, the 6-month bill is issued more often, every two weeks, compared to the 1-year bill, which is issued four times a year, quarterly.

Due to the uncertainty of non-competitive offering prices and distribution restrictions, it may be beneficial for investors to build positions across multiple government bond issues rather than investing in a single issue at once. For example, in the previous issue of the 6-month bond BS23113V, non-competitive applicants received only 96% of applications.

By spreading your investment over multiple issues (which is possible for 6-month T-bills), you can minimize the risk of adverse interest rates if you bid uncompetitively.

Upcoming 6-month government bonds 2023

Upcoming one-year government bonds 2023

Also read:Why every Singaporean should apply to invest OA funds in T-bills

Understand your needs and learn about alternatives

Investing in 1-year T-bills is generally believed to guarantee the same return as 6-month T-bills, but with a longer maturity. However, as explained by the inverted yield curve, 1-year T-bills may not yield better or equal returns than 6-month T-bills. Additionally, consider your liquidity and investment goals before deciding to lock in an interest rate for the long term.

Alternatively, you can explore other investment options such as StashAway Simpleguarantee. It provides capital protection and interest return equal to a term deposit and is suitable as a short-term investment. Otherwise, you can also consider money market funds for long-term investment.

Also read:Investing in Fixed Deposits: How StashAway Simple Guarantees Locking in Fixed Returns as Markets Become More Volatile

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