Federal Government-Issued Treasury Bills: All You Need To Know

Every government needs to borrow to finance its running costs as well as its infrastructural project. This need is more so in Nigeria as the Federal Government finds itself owing every Tom, Dick, and Harry. On the part of the Nigerian citizen, an investment that yields considerable returns over one year isn’t an entirely bad idea. Thus, the need for debt securities known as Treasury bills is born.

What Are Treasury Bills?

Treasury bills (T-bills) are short-term sovereign debt securities maturing in 364 days or less. They are sold at a discount and redeemed at par (face value amount). These bills are by nature, the most liquid money market securities and are backed by the guarantee of the government of a sovereign nation (in this case, Nigeria).

The Federal Government, through the Central Bank, issues Nigerian T-bills periodically to meet the government’s short-term funding needs. Nigerian T-bills are usually issued through a competitive bidding process, following which they are quoted and traded on relevant platforms on exchanges.

In simpler terms, governments of countries periodically borrow money from the public and in exchange, they issue a “certificate” called Treasury Bills. These bills contain details of how long the loan will be repaid (tenor) and how much interest is associated with it (discount rate). Treasury Bills can be traded to another party and the interest accruable is paid at the beginning of the agreement.

How are Treasury Bills Sold?

Treasury Bills are sold through a bi-weekly auction carried out by the CBN. An advertisement, inviting bids for the Treasury Bills, is placed in selected national dailies before the auction. Buyers are requested to quote bids following which the average minimum bid is chosen.

Results of CBN Auctions from July 2022. (Credit: Instagram.com/@getfinanceandinvestmenttips)

However, due to the cumbersome process required to bid directly in the CBN’s auction, treasury Bills can be bought through any official dealer. The easiest these days are through banks’ treasury bill mobile applications. A typical example is Sterling Bank’s i-invest.

What is the Minimum Amount of Treasury Bills You can Buy?

Before now, you could buy treasury bills for as low as N10,000 and in multiples of N1,000 thereafter. However, this was increased to N50,000,001 in 2017 (although the CBN FAQ still maintains a N10,000 benchmark). This article explains how you can buy treasury bills if you do not have up to N50 million. Different banks offer different minimum purchasing benchmarks.

When Are Treasury Bills Usually sold?

Treasury Bills are sold every other Wednesday (bi-weekly) as announced by the CBN on its website and select national dailies. You may also ask your bank account officer to notify you ahead of an issuance.

How Can You Buy Treasury Bills?

To buy Treasury Bills you have to approach your bank requesting a form with which to buy treasury bills. You fill the form with your personal information, also indicating the amount you want to buy, as well as your bid rate. With the advent of banks’ treasury bills mobile applications, you are only required to fill out a signup form once. BONUS: Follow the link to use Nairametrics’ treasury bills calculator

What is the Bid Rate?

The bid rate, also called STOP RATE, is the likely interest rate that you have indicated to receive for the principal that you investing in the Treasury Bills. For example, you can indicate an interest rate of 5% as your expected rate. Your bid rate will most likely be different from that of other intending buyers of Treasury Bills.

How is the Final Bid Rate selected?

The CBN selects the bids that fall below the accepted marginal rates. The Marginal Rate is the minimum average rate for bids submitted within a bid auction window. For example, if the marginal bid rate for a bid opened on Wednesday 24 August is 10%, bids falling below this rate will be accepted and those above rejected.

What if You don’t have a Bid rate?

If you do not have an intended bid rate or are unsure which you should select then you can opt for having the bank choose a rate for you. However, this does not guarantee that the bank rate will be chosen.

What if Your funds don’t get pooled?

You still have a different choice. Rediscounted Treasury Bills can be purchased from the bank. In essence, you're purchasing from someone else who needs money now and isn't ready to wait for the treasury bills to mature. For ordinary investors with less than N1 million in cash to invest, banks normally favor this option. The distinction between doing this and purchasing on the open market is that you might not receive the same interest rate as individuals who purchased on the open market. The difference is not that significant, though.

Can You still buy if Your Bid is rejected?

You can purchase Treasury Bills from the secondary market Over The Counter (OTC) through various brokers on the Stock and securities exchange. This is also where buyers and sellers of Treasury Bills trade the treasury bills in exchange for cash. What are the Maturity Durations (tenor) for Nigerian Treasury Bills? Treasury Bills are usually issued for 91-day, 182-day, and 364-day tenors. As such, you can have the CBN hold your cash for 91 days, 182 days, or 364 days, depending on your choice of tenor when investing in treasury bills. However, the CBN can decide whether they want to sell Treasury Bills for all the tenors available or either of them.

Can You sell before Maturity?

Yes, you can sell Treasury Bills before they mature. As mentioned above, this can be done through the secondary financial market. The forces of supply and demand determine the price at which you sell. For instance, a Treasury Bill with a N100,000 face value can sell for less or more according to the purchasers' anticipated yield. Your ability to sell Treasury Bills at a profit depends on whether your face value is trading at a greater price. For example, your N100,000 bill may sell for N101,000 or more. If the face value of your Treasury Bills is selling at a lower price, you can sell them at a lower price—for example, your N100,000 bill could sell for N99,000 or less.

When is the interest paid?

The interest on a treasury bill is paid beforehand and credited to your bank account. For instance, the CBN will debit your account with N90,000 if you buy a N100,000 T-bill with a 10% interest rate. As a result, your N10,000 interest is paid upfront. Upon maturity, you receive the N100,000 face value. Your genuine yield is larger because your interest is paid upfront.

https://twitter.com/FinPlanKaluAja1/status/1398936682330656768?s=20&t=yTxr1OIuUFs8sgdd5QYPcQ

What is a True Yield?

True Yield is your actual Return on Investment, i.e. (ROI). Your true Return on Investment is your True Yield (ROI). The initial yield for the N100,000 in the aforementioned case is 10%. The genuine yield, however, is the N10,000 in interest divided by the N90,000 taken out of your account because the CBN pays you interest upfront. N10,000 divided by N90,000 equals 11.11%. As a result, this is greater than the 10% coupon. When you hold your Treasury Bills out until maturity, the True Yield is fully earned.

Apart from the Interest Rates, what are the benefits?

• Treasury Bills are a good investment outlet for your disposable cash
• Returns accruing from Treasury Bills are tax-free.
• They can be used as collateral.

Here is a short video that explains Treasury Bills in detail:

https://www.youtube.com/watch?v=pXYnUZzJhbM

Final Words

This guide has been able to outline what treasury bills are, how you can invest in them, and what you stand to gain (or lose) by investing in them. If you decide to go ahead with Treasury bills, please understand that although it is a low-risk financial product, it is not risk-free.