Toni-Ann Neita, Staff ReporterIf you planned to buy a good quality suit in two months' time, and were guaranteed in addition to the suit, a shirt or blouse, tie or scarf, socks or stockings and cuff links or a brooch for the price of the suit, then that would be a good deal. Hence, the beauty of Treasury bills - you are guaranteed your capital outlay in addition to a small return which is guaranteed and protected by the Government.
Governments around the world, unfortunately, build up debt. Treasury bills are a way for average folk to benefit from this fact.
Governments borrow money to raise cash needed to pay off maturing debt and to maintain their operations. A Treasury bill is a debt instrument issued by the Government in exchange for lending it money. As such, Treasury bills can be used for financing temporary shortfalls in a Government's budget.
When you buy Treasury bills you, yes you, are lending money to the Government.
But what exactly is a Treasury bill?
ABOUT T-BILLS
A Treasury bill, according to the Collins Dictionary of Economics, is a financial security issued by a country's central bank (which in our case is the Bank of Jamaica) as a means for the Government to borrow money for short periods of time. That is, the central bank may sell Treasury bills as a means of transferring spending power from the public to the Government.
A Treasury bill represents a short-term loan to the Government for periods not exceeding a year.
Treasury bills, also called T-bills, are meant for short-term investing.
The maturity period for a T-bill is no longer than a year. T-bills are often referred to by their tenures/maturity dates. For example, there are 90-day bills, 180-day bills and 365-day bills. Thus the name of T-bills denotes its maturity; maturity being the period after which a debt becomes due for payment.
Treasury bills are one example of what is known in the investment world as "fixed interest investments". This fancy term simply means that T-bills do not pay periodic interest. Instead they are sold at a discount from their par, or face, value. Upon maturity, the investor receives the face value.
The return to the investors is the difference between the price paid for the bills and the amount received at maturity. This difference is treated as interest.
BUYING T-BILLS
Most Treasury bills are bought by primary dealers - financial institutions that are active in buying and selling government securities. Examples of primary dealers in Jamaica include the Jamaica Money Market Brokers (JMMB), Barita Investments Ltd. and Manufacturers Sigma Merchant Bank (MSMB) Ltd.
According to Trading Manager of JMMB Ltd., Bruce Miller, the Jamaican Government issues T-bills about four times per quarter or 16 times for the calendar year.
When the Government announces that it will be offering, for example, one billion 180-day Treasury bills this is what is referred to by the phrase "Treasury bills coming out for tender".
Based on an individual's or company's own initiative, or advice of their broker, investors then bid on the instrument.
There are the two types of bidding for a Treasury bill. When you bid for a T-bill, you must choose whether to bid competitively or non-competitively. If you place a non-competitive bid, you are guaranteed to receive the bills you desire.
What's the catch? It's not a catch, really, but by bidding non-competitively you agree to accept whatever price is determined by the 'auction'.
Most individual investors submit non-competitive bids, especially those that don't consider themselves expert traders.
A competitive bid is one where you specify the rate or yield you will accept. These bids are also called "tenders". Several bids are submitted and the highest bid, or bids, is accepted while the others are rejected.
Most financial institutions (banks, insurance companies, brokerages, and so on) submit competitive bids.
As an individual purchasing treasury bills it is recommended that one do so through a broker or primary dealer. Remember, of course, that you will have to pay them a small fee to acquire these instruments for you.
BENEFITS
"Treasury bills are regarded as risk-free investments," says Mr. Miller.
In fact, the primary benefit of Treasury bills is safety. No other investment carries as strong a guarantee that interest and principal will be paid on time. After all, they are backed by the full faith and credit of the Government.
Because these payments are predictable, many people invest in them to receive a dependable income stream - to meet living expenses during retirement, for example, or to fund specific objectives such as paying for a college education.
The disadvantage of the risk-free rate of T-bills is that they are generally considered the bottom of the yield pile; Treasury bills pay somewhat lower rates than other investments. Many investors accept this as a trade-off for security.
As the level of risk gets greater, the reward also increases. You can expect a better yield (but more risk) from stocks with similar maturities.
Since they offer the highest degree of creditworthiness, Treasury bills should be the foundation of any well-diversified portfolio. In a diversified portfolio, Treasury bills usually represent money that investors want to keep safe from risk. So, if you are building a balanced portfolio to protect you against uncertain times, Treasury bills merit serious consideration.
Another important characteristic of the Treasury market is its high level of liquidity, which means they are easy to buy and sell.
"They are the most liquid investment instrument. It's almost like cash," says chairman of Barita Investment Ltd., Rita Humphries-Lewin.
Another advantage of T-bills is that they are available with a wide range of maturity dates. This allows investors to structure a portfolio that suit their precise needs.
In the United States of America, for example, T-bills have an additional benefit in that they are exempt from state and local income tax. However, in Jamaica, Treasury bills are taxable. "All instruments are subject to tax," says Mrs. Humphries-Lewin.
Perhaps one of the nicest advantages of Treasury bills, in my opinion, is their simplicity. Treasury bills are an uncomplicated investment. It is easy to understand Treasury bills which can be very reassuring in today's complex financial world.
Since T-bills are free of default risk and are among the most liquid of financial instruments, they are a popular investment for both individuals and institutions.
CAUTION
Just a few words of caution regarding Treasury bills:
Although Treasury bills are considered free from default risk, they are affected by other types of risk, principally inflation risk and interest rate risk.
With any investment, there is the risk that the value of the money you invest will not keep up with inflation. In general, this risk is greatest with fixed interest investments, like Treasury bills, where the rate of return is set.
Secondly, while investor are guaranteed to receive interest and principal as promised, the underlying value of the treasury bill itself may change depending on the direction of interest rates.
As with all fixed-income investments, if interest rates in general rise after a Treasury bill is issued, the market value of the issued T-bill will fall.
CHOOSING T-BILLS
"If you are a conservative investor looking for a steady stream of income over time, then investing in Treasury bills might be the choice for you," says manager of asset trading at MSMB, Bob Blake.
Set a strategy for T-bill investing, says one Jamaican broker, such as staggering your returns by buying bills with different maturities. Consider all other short-term choices for your money before buying a T-bill. For example, for total liquidity, you'd be better off with a money-market fund or bank account, he said.
"By and large, Jamaicans prefer fixed interest investments," says Mr. Blake. "They are popular because the psyche of the Jamaican market is best described as cautious and risk adverse."
