Understanding and Investing in the Treasury Bill Market
In the space of financial investments, there are long-term investments such as the stock market, medium-term investments such as bonds, as well as short-term instruments such as treasury bills.
Treasury bills are short-term debt securities issued by the federal government of any country through its central bank to raise short-term funds from individuals, institutional investors, organizations non-governmental organizations, religious organizations, etc., in order to finance the government’s budget deficit. .
Basically, when individual or corporate investors buy treasury bills, they are lending money to the government. The Nigerian government uses the money to meet its obligations such as financing its debt and paying for current expenses such as salaries and military equipment.
Treasury Bills are issued by the Central Bank of Nigeria (CBN) and are guaranteed and backed with the full confidence of the Federal Government of Nigeria. Because they are collateralized, treasury bills are risk-free, short-term investments.
Treasury bills can be purchased on a primary or secondary market. In Nigeria, the CBN holds treasury bill auctions usually fortnightly in the primary market and asks investors to quote the rates they are willing to pay on the different maturities of treasury bills, usually 91 days, 182 days and 364 days. implements.
During the auction, the maximum rate at which the CBN is willing to sell is called the stop-out rate. Any investor who quotes below or at this rate gets the quoted amount and at the individual rate and any investor who quotes above the stop rate is bid.
While the primary market is held every two weeks, in the secondary market treasury bills can be purchased every other day. To buy treasury bills at the primary mark, an investor must be prepared to invest at least 50 million naira while in the secondary market, investors can invest a minimum of 100,000 naira.
How it works
Treasury bills are issued for a specific period, usually 91 days (3 months), 182 days (6 months) and 364 days (one year) in the primary market. Treasury bill rates are quoted annually; therefore, an investor only gets the full rate if the duration is 364 days.
For example, if the rate of a 182-day Treasury bill is quoted at 10%, the investor effectively obtains 5%. However, in the secondary market, treasury bills can be purchased at irregular tenors ranging from one to 363 days.
Treasury bills are issued at an interest rate often called the discount rate. This is because the investor gets his interest upfront. This means that the interest promised on a treasury bill instrument is payable on the same day the investment begins.
For example, if a treasury bill promises a rate of 10% per annum and an investor wishes to invest N100,000, the investor pays only N90,000 from the day of investment but gets back N100,000 at deadline. The value at maturity which is N100,000 is called face value while the initial investment of N90,000 is called present value.
As the interest is prepaid, the true return is actually the N10,000 of interest received divided by the N90,000 actually paid. This is N10,000/N90,000 translating to 11.11%. However, this rate is higher than the rate of 10 percent per year. The actual return is fully earned when investors hold to maturity.
In the secondary market, you can sell treasury bills before maturity. However, the price at which you sell depends on the prevailing interest rate. For example, a T-Bill with a face value (FV) of N100,000 may sell for less or more depending on the prevailing interest rate at the time of the sale, as yield expectations influence interest rates. ‘interest.
If your FV is trading at a higher price, that means you can sell your Treasury bonds at a profit, so your N100,000 can sell for N101,000 or more. If your FV is trading at a lower price, it means that you can sell your Treasuries at a loss and therefore your N100,000 can sell for N99,000 or less.
Benefits of Investing in Treasury Bills
Treasury bills in Nigeria are backed by the full trust of the Federal Government; therefore, there is no default. In the event that the government cannot pay, the CBN can print money to pay all investors.
Investing in treasury bills encourages savings and can be easily converted into cash.
Treasury bills also pay higher interest than an investor will get from a commercial bank, along with the fact that the treasury bill certificate can be used as collateral for bank loans.
Its active secondary market also guarantees ease not only of entry, but also of exit.
Treasury bills also provide an investment opportunity not only for the big player in the investment world, but also for small and new payers in the debt instruments market.
Like other types of debt securities, the price of treasury bills and the return to investors can be affected by various factors such as macroeconomic conditions, investor risk tolerance, inflation, monetary policy and market conditions. specific supply and demand conditions for treasury bills.