Investing in Treasury Bills Simplified

In continuation of my ‘Simplified’ series, I want to break down further and walk you through the process of investing in treasury bills (Nigerian Treasury Bills (NTB)).

A market directive by the Debt Management Office (DMO) effective March 7, 2017, has raised the minimum subscription for Nigerian Treasury bills through the primary market from N10,000 to N50 million naira.

This article addresses investing in Nigerian Treasury bills through the primary market. This means if you have less than N50Million, you can only invest in treasury bills through the secondary market, unless if you have a broker that has an arrangement whereby some investors can come together to raise at least N50 Million so that they can access the primary market

1. Nigerian treasury bills are issued by the Central Bank of Nigeria (CBN) to raise money for the government and manage liquidity in the system.
2. It comes in 3 tenors, 91 days, 182 days, and 364 days. The interest is usually paid upfront (discounted).
3. Nigerian treasury bills are sold bi-weekly (every 2 weeks) in a primary auction. The primary auction usually holds on Wednesdays. Upcoming primary auctions are usually reported in the financial section of national newspapers. The CBN also publishes a quarterly treasury bills auction calendar on its website.
4. The interest rate is not fixed but fluctuates based on demand (volume of bids) and supply (amount offered by CBN).
5. After each auction, winning bids are selected (lowest bidders) that meet the cut-off that corresponds to the amount CBN wants to raise in that auction/tenor. To illustrate, let’s say the CBN wants to raise N50 billion through 364 days of tenor treasury bills at the upcoming auction. At the close of the auction, allocations will be made starting from the lowest bidder, 2nd lowest bidder, and so on until the cut-off of N50 billion is met. The rate at the cut-off point is known as the stop rate or marginal rate. Those who bided above this rate will get no allocation. You may then have to buy from the secondary market (from folks who won and want to sell).
6. To find out what the current rate is, visit the CBN web page – www.cenbank.org/rates/govtsecurities.asp and look for the marginal rate.
7. It is your decision what rate to bid at the primary auction. You can look at the results of the last primary auction and determine what rate to bid. If you are current with financial news, you will know the trend bid (money supply, the role of capital inflow by foreign investors, etc) and bid accordingly. If you find it difficult to decide the rate to bid, you can go with the house rate. Ask your broker what rate they are bidding, and go with it also.
8. You cannot bid directly at the primary auction. You have to go to a broker – your bank or finance house.
9. You have to remit funds a few days before the auction so that your broker can book your investment (if your bid is successful). Every bid must have cash backing.
10. Although the minimum amount is N10,000, each broker has a minimum amount they accept. This is for administrative convenience (to reduce the volume of paperwork – filing bids to CBN). If don’t have the required amount, you can save up by investing in other instruments (e.g. Mutual Funds) till you gather the amount required or look for another broker that accepts a lower minimum you can afford.

How do you go about Investing in Treasury Bills?

1. Make up your mind you want to participate in the upcoming treasury bills primary auction.
2. Go to your bank or broker some days before the primary auction and fill bid form.
3. The minimum sum required is N10,000 and then multiples of N1,000.
4. Most brokers may demand a higher minimum amount (for administrative convenience). You have 2 options – save up to the amount they are demanding or look for another broker that accepts a lower minimum you can afford.
5. You will be given forms to fill out, where you indicate your personal details, the amount you want to invest, and your bid rate. If you do not have an account with the broker, you will be required to open one. You are then required to remit the funds to cover the transaction.
6. If your bid is successful, your investment will be booked and the money moved from your account.
7. The money will be domiciled (kept) with a Custodian of your choice, not your broker. You will be charged a token (a fraction of a percent) by your broker for services rendered and Custodian fees.
8. You will be credited with the interest on the investment and issued your investment paper showing details of your investment and the Custodian where your investment is domiciled.
9. If you were unsuccessful (your bid rate was too high – i.e. above marginal rate), your money will remain in your account with your broker. You can then decide what to do, either to wait for the next primary auction or buy from your broker (secondary market). Brokers usually buy in bulk to resell/allocate to their money market funds)

As an illustration, let’s assume you invested N1M in treasury bills for 364 days at 13% interest rate. Your investment paper will carry the following information.

Face Value: N1M (to be credited to your account at maturity)
Discounted Value: N870,000 (the amount actually taken from your deposit)
Discount Rate: 13%
Value Date: Today (The date your investment was booked)
Maturity Date: Next Year (The date your investment will mature in 364 days)
Tenor: 364 Days
Upfront Interest: N130,000 (this will be returned to you as interest)
Custodian Fee (0.XXX %): Amount charged by the Custodian
Commission (0.XXX %): Amount charged by your broker
VAT 5% on Custodian Fee: VAT on Custodian fee.

You can choose to reinvest your interest in the secondary market or move it into another money market instrument like fixed deposits etc.