Making money with Nigerian treasury bills

Making money with Nigerian treasury bills is a smart way to optimize your investments. The Debt management office centrally coordinate the management of Nigeria’s debt. The DMO recently conducted bond auctions on April 25 2018 to raise funds for the implementation of the 2018 Budget.

Treasury bills definition

Treasury bills are short-termed debt instrument issued by the federal government through the central bank to provide short-term funding for the government. They are by nature, the most liquid money market securities and are backed by the government of the federal government.

They are usually used for tenors of 91days(3months), 182days (6months), 364days (1year) at the primary market auction held forth nighty by the central bank. The interest rate at the auction is not fixed but fluctuate based on demand and amount offered by the apex bank. However, there are other tenors available in the secondary market based on prevailing rates. Other commercial banks can provide rediscounting facilities and can purchase your bills from you at any point.

In other words, Treasury bills are short -term sovereign debt securities maturing in one year or less. The treasury bills have some benefits such as;

1. It is a risk-free investment as it carries the guarantee of the federal government.
2. Treasury bills are highly liquid instruments and can be used as collateral.
3. Liquidity-active secondary market for ease of entry and exit.
4. It is a discount instrument enabling the investor to earn interest upfront, thereby, increasing the effective yield on investment.
5. Interest earned on tax.

The T-bill rate is a key barometer of short-term interest rates. Treasury bills are sold with maturities of four, thirteen, twenty-six and fifty-two weeks. They do not pay interest, but rather are sold a discount to their face value. The full-face value is paid at maturity, and the difference between the discounted purchase price and the full-face value equates to the interest rate.

Purchasing T-Bills

There are three ways to purchase T-bills and all other Treasury securities:

• Non-competitive bid auctions allow investors to submit a bid to purchase a set dollar amount of the Bills at the next auction. The yield they receive is based upon the average auction price from all bidders. This is a good method for individual investors.
• Competitive bidding auctions are geared for those who only want to buy the bills at a specific or desired yield. These bids must be made via a bank or a broker. A buyer can purchase up to 35% of the amount of the initial offering for the bill being auctioned.
• You can purchase them on the secondary market or via mutual funds and ETFs. T-bills, like all Treasury securities, can be bought and sold on the secondary market. Additionally, there are a number of mutual funds and ETFs that purchase T-bills.

The Secondary Market

There is an active secondary market for T-bills, but in order to buy or sell bills here you will need to use a broker as a middle-man. T-bills are very liquid and short-term, but the price will fluctuate based on movements in the rate on newly issued T-bills.

Who are the major buyers?

Although T-bills can be bought by individual investors, primary dealers, such as banks and broker-dealers, are the biggest purchasers of T-bills at the various auctions.

Other major auction participants include investment funds, pension plans and retirement funds, insurance companies and other large institutional managers.

Nigerian Government bond auctions