Not a few Nigerians know how to invest their funds in securities, especially secured ones. This article is designed to be a guide for such people to know how to invest in Treasury bills, a secure, short-term investment, offering you returns after a relatively short commitment of funds. Treasury Bill rates are attractive, providing an excellent investment opportunity that is readily available, as they are auctioned every time.
Treasury Bills are sold at a discount. This means that investors choose the amount that they will receive when the bill matures, or the face value of the bill, and pay less than that amount when purchasing it.
Individuals and corporate bodies can invest in Treasury Bills as a nominee of a commercial bank, but if you hold a bank account with a local commercial bank you can also invest directly through the central bank and avoid additional charges. To purchase Treasury bills, one is expected to follow the steps bellow:
In a non-competitive bid, the investor agrees to accept the discount rate determined at auction. The yield that an investor receives is equal to the average auction price for T-bills sold at auction. Most individual investors prefer this method since they are guaranteed to receive the full amount of the bill at the expiry of the maturity period. Payment is mostly made through the investor’s bank or broker.
Competitive bidding auctions
In a competitive bidding auction, investors buy Treasury Bills at a specific discount rate that they are willing to accept. Every submitted bid states the lowest rate or discount margin that the bidder/investor is willing to accept. Bids accepting the lowest discount rate are accepted first.
If there are not enough bids at that level to make the issue fully subscribed, then bids at the next lowest rate are accepted. The process continues until the entire issue has been sold. Purchase payments must be made either through a bank or your broker.
Investors can buy or sell Treasury Bills on the secondar market. Also, there are mutual funds and exchange-traded funds that hold previously issued T-bills.
Beyond that, this article also aims to provide explanation to some of the elementary questions about Treasury Bills.
How do you buy Treasury Bills?
You can purchase Treasury Bills at the nearest commercial bank, through a dealer or broker. The bills are issued through an auction bidding process, which occurs weekly. Treasury bills are now issued only in electronic form, though they used to be paper bills.
Can individuals invest in Treasury Bills?
Government Treasury Bills can be procured by individuals at a discount to the face value of the security and are redeemed at their nominal value, thereby allowing investors to pocket the difference. For example, a 91-day treasury bill with a face value of Rs. 120 can be bought at a discounted price of Rs. 118.40.
How can I invest in Treasury Bills in Nigeria?
Any member of the public can invest in the Nigeria Treasury Bills; individuals, Corporate Bodies (Private and Public), Institutions (Private and Public), Banks, Discount Houses, and Brokers. Investing in Treasury Bills is by auction Subscriptions at the market for 91,182, 365 and 730 days
Can you lose money in Treasury Bills?
Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal. In other words, investors that hold the bond until maturity are guaranteed their principal or initial investment.
Is T-bills a good investment?
Both fixed deposits and treasury bills can be rewarding investments. The interest gained by investing in a treasury bill is definitely higher than the interest offered by bank fixed deposits.
How much interest can you earn from a treasury bill?
For example, a 52-week, N100,000 T-bill with a rate of 1.5 percent would cost N98,500. The current rate of Treasury bills slightly understates the earned yield, as the invested amount is less than the face amount. In the example, an investor would earn N1,500 on a N98,500 investment, which is a yield of 1.523 per cent.
What is one downside to investing in Treasuries?
If you invest in Treasuries, more often than not you could have profited more with another safe bond investment. This is one of the biggest risks for Treasuries investors—that in being too afraid of risk, they’ve invested too heavily in low interest-rate Treasuries.
How does investment in Treasury Bills work?
Treasury bills are short-term sovereign debt securities maturing in one year or less. They are sold at a discount and redeemed at par. These Bills are by nature, the most liquid money market securities and are backed by the guarantee of the federal government of a nation.
When an investor buys a Treasury Bill, she/he is lending money to the government. The federal government – for isnatnce- uses the money to fund its debt and pay ongoing expenses such as building of infrastructures and military equipment for the prosecution of the war against insurgency. T-Bills are sold in denominations.
Auctions in the Nigerian Treasury Bill (T-bill) market in March this year, for example, reached yields of 5.5 per cent (for 1-year paper), trending upwards and trading much higher than yields in the secondary market, according to data from the Debt Management Office (DMO). “We think that T-bill yields can reach 10.0 per cent per annum, if not higher, by mid-year. There is also a complex connection with rising US dollar bond yields,” analysts at Proshare, markets said in a reaction to the auction result.
The secondary market yield for an FGN Naira bond with 10 years to maturity declined by 2bps to 10.77 per cent and at 7-years declined by 12bps to 10.33 per cent while at 3-years the yield declined by 110bps to 6.84 per cent, making the yield curve steeper (see page 2). What that means is that longdated federal government of Nigeria bonds have been selling off while maturities of 5-years and under are being bought. The annualized yield on a 335-day T-bill remained unchanged at 2.07 per cent in the secondary market, while the yield on a 333-day open market operation (OMO) bill of the CBN declined by 64bps to 8.96 per cent. At last week’s Primary Market Auction for T-bills, on the other hand, the stop rates closed higher by c.133bps on average across the three tenors, closing at 2.00bper cent, 3.50 per cent, and 5.50 per cent for the 91-, 182- and 364-day offers respectively. Although there is noticeable rotation in the bond market from long-dated to short-dated maturities, we believe that the overall trend in rates is upwards and will remain so for at least several weeks.
On the flip side, investors’ interest in the FGN TBs reportedly record a significant decline with 19 per cent, year-on-year (YoY) decline in sales to N1.35 trillion in the first five months of this year, a situation money market dealers analysts attributed to the rebound in both yields and volume in the Open Market Operation (OMO) of the Central Bank of Nigeria (CBN) and other alternative investment instruments.