Five Cents Ten Cents

Monday, June 11, 2007

How to renew your treasury bills automatically on poems


5C_tbills_rollover
Originally uploaded by panzergrenadier
The more I learn about treasury bills, the more I realise it is a good addition to your investment portfolio under the category of money market instruments.

Similar to a fixed deposit (time deposit), you can also do auto-renewal of your 3 month treasury bills using poems.

How does it work, let's look at what poems say,

Terms & Conditions for Rollover

(source: www.poems.com.sg)

"1. By opting for rollover, you are instructing us to repurchase for you, another Treasury Bill upon maturity of your existing paper.
2. We will buy for you, a similar quantity at the next available MAS auction.
3. If this bid is successful, your trade will be processed at a cost of 10 basis points from the actual auction yield. Should the auction bid be unsuccessful, your trade will be processed at the yield available in the secondary market, without deducting an additional spread.
4. This rollover feature will continue indefinitely, until you opt out. That is, we will continue to buy for you a similar quantity upon maturity at the next available auction, until otherwise notified.
5. Opting in or out of rollover must be finalized by 5 trade days before the maturity of your existing paper. After this cut-off date, no changes are allowed.
6. You are only allowed to select rollover for securities that are in your portfolio. "

Points to note for treasury bills investors
Now the interesting point about rollovers by poems is that the spread will be 10 basis points (0.1%) versus 15 basis points (0.15%) that is normal when you buy treasury bills through poems. Why would Phillip securities give you this slight discount? The reason is that when you do a rollover, you take the risk that the yield may go up or down since treasury bills are weekly auctions by the MAS and primary dealers (financial institutions) and the price (or yield) is only know after all bidders have submitted their bids and the MAS decides on what is the cut-off yield that were successfully in bidding for the treasury bills tranche offered by MAS.

Pros and cons of using rollover
But this convenience allows you to let your treasury bills ride on for autorenewal especially if you have earmarked a certain portion of your portfolio in this very low risk and reasonable yielding asset that is guaranteed by the Government. The only
catch is that you need to monitor the direction of the treasury bills yield about a week prior to te renewal date so that if you think yields are going way below that of 3 month fixed deposits of similar denomination, then you may want to stop the rollover.

However, if treasury bills yields are trending up, then your rollover will allow you to capture that yield and yet save 5 basis points on the spread that Phillip securities makes from offering this service. So far, I have been very satisfied with treasury bills using poems because the ease and convenience is unsurpassed. 15 basis points I believe is fair payment to them for offering this service to customers.

Try rollover if you want to sleep well at night
If you are an investor who has already decided at a certain percentage of your portfolio should be in treasury bills for the safety and as a protection against the fluctuations in the stock market, consider the rollover option but remember you will have to accept whatever yield is done at the auction. Caveat emptor, so do your own risk assessment and due diligence if this is suitable for you.

Be well and prosper.

3 comments:

Anonymous said...

Hi PanzerGrenadier,

Is the normal 15 basis points spread stated in POEMS website? Or is it based on observation?

Thanks.

PanzerGrenadier said...

dear choozm

The 15 basis points is what I observed. I think this is not fixed by phillips as it is really up to decide since technically they are selling to us on the secondary market since they are the ones who bid through the primary dealer (i.e. bank) for the t bills.

Anonymous said...

Why do you want to pay the phillip people when you can get this done with no spread at the banks. You are better off buying straight from the primary dealers. 10 basis points is not little. You are only making 200 basis points each time. T bills is low yield so don't waste monet lah.