Financial Security: Investing in Treasury Bills

Treasury bills are one of the money market instruments or vehicles an investor can use to generate fixed-interest income. Nigeria Treasury Bills (NTBs) are short-term debt instruments issued by the Federal Government through the Central Bank of Nigeria (CBN) to finance short-term expenditures. They are by nature, the most liquid money market securities and, are backed by the guarantee of the Federal Government. They are usually issued for tenors of 91 days, 182 days, and 364 days.

Treasury Bills are discounted instruments, which are purchased for a price less than their par (face) value; and at maturity, the holder of the bills is paid the full par value by the government. In effect, the interest is paid upfront. The investor can opt to take the interest as income or reinvest for compound returns. It is a risk-free investment – it carries the guarantee of the Federal Government of Nigeria, or any nation issuing it. Interest income from Treasury Bills is typically higher than fixed deposits etc because it is tax-free (not subject to withholding tax) and the rates are not fixed by banks. Interest is upfront, which means you can reinvest your interest from day one. Treasury Bill certificates can be used as collateral against borrowing.

There are two options when it comes to investing in Treasury Bills (TBs)

a) PRIMARY MARKET

You can purchase treasury bills at the primary market, a Dutch Auction at the Central Bank of Nigeria (CBN) which is held fortnightly (every 2 weeks).

This is how it works:

• The CBN makes announcements in the newspapers about forthcoming Treasury Bills auction usually of 91, 182, and 364 days tenor.
• Potential investors submit their bids, through a Primary Dealer/Market Maker (banks, finance houses, etc), indicating tenor, amount, and bid rate. The minimum depends on the agent and ranges from N10,000 and above.
• At the Dutch auction, various bids are submitted at various rates and the highest bid at which the total volume of bills on offer is sold closes the auction.
• An investor will be successful at the auction where the bid rate quoted is below or at par with the closing rate.
• Where successful, the investor is notified and pays a discounted value of the bid amount at the rate indicated on the day after the Dutch auction (T+1) as settlement.
• The investor also advises his agent to move the NTBs purchased to his custodian bank and then lodges the same in the investor’s CSCS account.
• Where an investor does not have a CSCS account, an investment agent can, on request, act as its custodian and hold the treasury bills until maturity.
• The investment agent sends a letter to the investor indicating all the terms of the Treasury Bills.

Where a bidder is unsuccessful, he can still purchase Treasury Bills at the secondary market at a lower rate. Treasury Bills are liquid money market instruments and can be sold at the secondary market at any time at a discount.

b) SECONDARY MARKET

Banks and finance houses (Primary Dealers/Market Makers) also buy Treasury Bills in blocks to sell to their clients in the secondary market at a discount. Let’s assume the Primary Dealer bought N250M worth of Treasury Bills at the Dutch Auction at 12.5%, he can turn around and sell to customers (who cannot wait for the next auction) at 11.7% depending on the amount, netting a profit of 0.8% in that transaction. The buyer will take over the Treasury Bills for the remaining days of the tenor. Transactions in the secondary market happen on a daily basis. The minimum amount of investment varies from dealer to dealer.