What are treasury bills?

Posted by Felix Okoli on Saturday July 13, 2013 at 12:44:31:

Treasury bills are discounted short-term instruments used by the national or federal governments to regulate money supply or manage liquidity systems in a country. The T-bills as familiarly known, are provided through a national central bank to the public for a maturity period (not less than one year). The T-bills are regarded as one of the safest investments since they are regarded there exists the faith of the government hence carry no or less risks. In most countries, T-bills are very popular with institutional investors. The credit worthiness of national or federal governments and that of the T-bills is enhanced by the volume of investment these funds.

Some of the general features of treasury bills include the following;

1. The issuer is the national governments' central banks. In Kenya for instance, the Central Bank of Kenya (CBK) is the issuer of T-bills to the public while in Nigeria, the Federal Government through the Central Bank of Nigeria (CBN) allows for investment of as low as N100, 000.00 in the Nigerian Treasury Bills.
2. Unlike other longer term debt instruments the T-bills are offered on a discounted basis, often referred to as risk-free rates. This enables investors to earn good interests on investments.
3. The T-bills are used by the national governments to regulate the flow and circulation of money in the economy. They are also used for managing liquidity through the Open Market Operations.
4. In Nigeria and Kenya, institutions or individuals can borrow using T-bills as collateral.This is not so with some investments.
5. I most Africa's national treasury bills, the -bills qualify for liquidity ratio computation. The bills are highly liquid and can be converted into cash at any time.
6. Tenors are usually short (maximum of 365 days) and range from 91 days (3 months).
The major reasons why the governments issue T-bills is to provide a liquid investment alternative with little or no risk for individual and institutional investors and to finance development expenditure. In this position, you are like a lender to the government. The government is able to support its monetary policies in the economy when this is done right.

Investment in T-bills is considered highly safe. The payment of interest and repayment of principal is assured by the government. In Kenya, the Central Bank does this on behalf of the government.
The issuance of T-bills is according to set procedures by the central banks. In Nigeria, Kenya South Africa and most African countries, an auction is held consistently where investors go through a competitive bid (as they quote prices) before they are the T-bills. This process depends on the number of bids and a consideration on the highest and the lowest bid by individuals or institutions.

As much as treasury bills are considered safe and easier to invest in, investors run away due to some defects or disadvantages. In Kenya for instance, there has been a decline in T-bills investment because it fetches low returns. The overall yield from this investment is only good when done in long term basis. Actively trading is also sometimes affected.