What is the cut-off yield in a Singapore T-bill auction?

T-Bills Auction System and Cut-Off Yield

The Singapore Government Securities (SGS) T-bill auction system allocates bids based on the yield offered, prioritizing those who are willing to accept the lowest return (highest price).

Allocation Process

There are two types of bids:

• Non-Competitive Bids: These bidders specify only the amount they wish to invest. 40% of the total T-bills offered are allocated to this group. If demand exceeds this 40% allocation, the amounts are pro-rated.
• Competitive Bids: These bidders specify both the yield they desire and the amount. These bids are ranked from the lowest yield to the highest yield. 60% of the T-bills are allocated to competitive bidders.

Determining the Cut-Off Yield

The cut-off yield is the yield of the last successful bid that exhausts the 60% allocation reserved for competitive bidders. Everyone who submitted a competitive bid at a yield equal to or lower than this cut-off yield will receive the T-bill allotment at that specific cut-off yield. Any bids submitted at a yield higher than the cut-off yield will receive no allotment.

Example and Context

Based on recent data, the latest cut-off yield observed was 3.7%. This means that if you bid competitively at 3.7% or lower, you would have secured an allotment at the 3.7% rate. Bidding above 3.7% would have resulted in rejection.

This mechanism ensures the government secures funding at the lowest possible cost, while investors are guaranteed a return based on the market clearing rate established during the auction.