Investing in short-term government securities - How to go about acquiring T-bills, repos

Oran Hall, Contributor

QUESTION: I would be grateful if you could advise as to which bank or any institution I should approach to deposit funds in 'short-term Government securities', the minimum period, and the amount required to be deposited. Thanking you in anticipation.

- Saranathan

PFA: The range of Government of Jamaica short-term securities has shrunk since the Jamaica Debt Exchange, but there are still instruments for individuals and institutions with liquidity, current income, and safety as their primary investment objectives.

The main instruments available are Treasury bills and repurchase agreements.

Treasury bills are financial instruments issued by the Bank of Jamaica (BOJ) to raise money for the Government of Jamaica. They are issued at a discount to face value and mature at face value or par.

By way of example, a Treasury bill may be issued at a price of $92 and mature at $100. The investor's income is the difference between the 100 and 92. The income so earned is subject to tax generally.

In the primary market, Treasury bills are bought from the BOJ at its regular auctions, which are advertised in the press. The BOJ accepts tenders for as little as J$5,000, with or without a price, but amounts above that must be by competitive bidding.

Public entities bidding for Treasury bills are not allowed to put in a price, and bids made without competitive bidding are allocated at the weighted average discount rate of successful bids.

Generally, the minimum size of Treasury bill transactions tends to be J$100,000, but there are isolated cases of dealers accepting orders for J$50,000, or even J$20,000.

Treasury bills may also be purchased on the secondary market from any of several licensed securities dealers. They are usually issued for up to one year, but there may be bills with maturities of 30, 90, 180, 270 days, or other maturities.

Secondary market

Bills trading on the secondary market are not limited to those maturities. The term of such bills for the new owners is the number of days between the date of purchase and the maturity date.

Repurchase agreements,commonly called repos, are investment contracts by which the seller of the investment instrument, which is usually a Government of Jamaica instrument, contracts to repurchase it from the buyer at a fixed price at an agreed future date, and to pay an agreed rate of return for the life of the contract. Although a repurchase contract may be for 30, 60, 90, 120, 180, 270, 365 days, and indeed any other period agreed between the contracting parties, the actual instruments being bought for resale may themselves have much longer maturities.

There are no commission charges on these transactions as the financial institutions tend to take a spread, meaning that they buy at one price, and sell at a higher price, or sell at a lower yield than the yield to themselves. Financial institutions set minimum transaction sizes at levels that will earn them a profit.

Government securities are not deposits and are not covered by deposit insurance. The purchaser should satisfy himself/herself that the contract note received as evidence of the transaction carries very accurate details of the transaction, including a description of the security that is being bought for resale. Large investors, in particular, should satisfy themselves that settlement is made in a form that gives them the required security and protection.

The Yellow Pages, under the headings "Investment" and "Investment Advisory and Securities Service", give a long list of companies licensed to trade in government and other securities. Rates and minimum size of transaction differ widely. This is true for both Jamaican dollar-denominated transactions and transactions in foreign currency, mostly the US dollar and sterling. Whereas there are traders of the former who do not transact business valued at less than J$500,000, others do J$50,000-transactions. Transactions in foreign currency denominated instruments generally start at US$5,000.

rate variations

Rates for 30-day repos range from 4.50 per cent to 5.75 per cent per annum, depending on the amount. Rates for 180-day transactions range from 4.50 per cent to 6.15 per cent per annum on the basis of the survey that I have conducted. The rates on 30-day US-dollar transactions range from 1.60 per cent to 2.3 per cent, and 180 day rates range from 2.1 per cent to 2.9 per cent.

The average yields of Treasury bills issued by the Bank of Jamaica on May 20, 2011, were as follows: 6.66 per cent for 28 days, 6.65 per cent for 91 days, and 6.58 per cent for 182 days. The public can buy Treasury bills directly from Bank of Jamaica, but not repos.

The BOJ sells repos to primary dealers; securities dealers also create their own, generally using Government of Jamaica securities.

Generally, most of the companies you will find listed in the Yellow Pages are reputable, but I would suggest that you satisfy yourself that they are by doing your own due diligence. A list of licensed securities dealers is available on the website of the Financial Services Commission.

Writing as an independent adviser, I prefer not to recommend any institution.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Email: finviser.jm@gmail.com