#BounceMasterclass: How To Invest In Treasury Bills (1)
Adekunle Chukwu graduated from the university in July 2015.
Having plunged right into the labour market immediately after his National Youth Service, he was able to secure a job with one of Nigeria’s commercial banks by the following September.
Chukwu earns 150,000-naira monthly salary, a good pay for any entry level position in Nigeria.
Single, with little responsibility except for his welfare and house rent, he has been able to amass about 650,000 in savings since then.
Lately, Chukwu has been considering investing this money instead of allowing it to stay idle in the bank while inflation eats it up.
But he is not quite sure where or how to invest this money.
One of the safest investment options available to Chukwu would be Treasury Bills. But even though he works in a bank, he’s still quite skeptical because he does not quite fully understand how it works.
So, what are Treasury Bills?
Treasury bills are government security that is short dated.
Short dated means it’s duration is usually within one year or less. It could be between 90 days, 182 days and 365 days.
It is a fixed income government security that the government usually issues through the Central Bank of Nigeria, CBN.
“Every two weeks, the government sells treasury bills to investors, both retail and institutional. The word retail means ordinary Nigerians can invest and institutional means banks, pension funds and other firms can invest as well,” says Ugo Obichukwu, financial analyst and Chief Executive Officer ofNairametrics.
“When government sells treasury bills, both investors bid to buy. What this basically means is that the government is borrowing from the people,” Obichukwu explains while speaking about treasury bills at Bounce Masterclass recently.
How it works
Assuming government wants to borrow 100 million naira, people who have lose cash such as Adekunle Chukwu can buy into and government will pay him interest.
*Founder/CEO of Nairametrics, Ugo Obichukwu (left) speaking about Treasury Bills with Jonah Nwokpoku (right) at Bounce Masterclass
The way government does it, is that it does not set an interest rate. They allow everybody to set their preferred interest rate.
For instance, if government wants to issue 1 million naira through treasury bills, and two people, Mr. Adekunle Chukwu and Mrs. Taiwo Mohammed - were to bid for it.
Mr. Adekunle Chukwu may say he wants to buy 400,000-naira worth of treasury bills at 10% interest rate.
While Mrs. Taiwo Mohammed may say she wants to buy 600,000-naira worth of treasury bills at 12%. Mr. Adekunle Chukwu and Mrs. Taiwo Mohammed have no idea what interest rates each of them quoted.
So, what government will do is to look at the two interest rates the both of them quoted and say, it will take Mr. Adekunle Chukwu’s own at 10% first before considering Mrs. Taiwo Mohammed’s 12%.
If there are more people willing to buy at Mr. Adekunle Chukwu’s 10% quote, government may be forced to keep Mrs. Taiwo in line waiting for another issue but if it’s just the two of them, then government would have no choice than to also take Mrs. Taiwo’s.
*Treasury bills is issued by the Central Bank of Nigeria every fortnight
But then there will now be an average of say, 11% and government would announce that they have successfully sold 1 million naira at an average interest rate of 11%.
So, at the end of the day, both Mr. Adekunle Chukwu and Mrs. Taiwo Mohammed would both get 11% interest rate paid to them.
However, in a market situation where there are lots of investors, those who bid above the average typically will not get.
Let’s say the government issues 100-million-naira worth of treasury bills, and the bids that they get is 200 million naira.
The people that will not be successful will be people who bid interest rate higher than the average.
For instance, if the government says it wants 100 million naira and 10,000 people bid for it. Among this 10,000 people, 8,000 bids at 10% and the remaining 2,000 people bid at 14%.
What government will do is to sell first to the 8,000 people that bid at 10%. They have qualified. So, when government says the average interest rate for everyone that bid is 11%, they will first sell to the 8,000 people that bid at 10%.
All those that bid above 11%, government will refund their money to them.
To be continued….
Also watch: 3 Things To Do To Attract Investors In Nigeria