Treasury Bills (T-Bills)

What Is a Treasury Bill (T-Bill)?

Treasury bills are short-term debt instruments issued by the government whenever they need money for a short period. A country's central government can only issue them, and the interest they provide depends on the market forces prevailing in a country. 

Investors typically lend money to the government when they buy a T-bill. The U.S. Government uses the money from investors to fund its ongoing expenses, including infrastructural projects, salaries, defense, and healthcare expenses.

These bills can be characterized by their maturity period, which has a maximum period of 364 days. Therefore, we can categorize them as money market instruments based on their maturity period. They are issued in three maturities- 91 days, 182 days, and 364 days.

These government bonds are typically sold at a discount from the par amount (also known as the face value). Whenever a bill matures, the investor gets paid its par amount. 

When the par value exceeds the purchase price of the bill, the resulting difference is the interest received by the investor.

It is also vital to note that these bills are particularly popular among income-seeking investors. In addition, these securities are favored and suitable for risk-averse investors looking for a reliable source of income. 

Nevertheless, they do not offer high-interest rates compared to other types of securities.

What Influences T-Bill Prices?

The prices of T-bills are influenced by factors such as economic conditions, market sentiment, and monetary policy. Understanding these influences is crucial for investors looking to make informed decisions in the fixed-income market. Some of the factors are as follows:

1. Maturity period

The time until the maturity of a T-bill has a direct impact on its yield. For instance, a one-year T-bill usually holds a higher rate of return than a three-month one since longer maturities signify an additional risk for investors - the higher the risk, the greater the reward.

For example, a $2,000 Treasury bill can be sold for $1,970 for a three-month maturity, $1950 for a six-month maturity, and $1,900 for a twelve-month maturity. As you can see, investors will ask for a higher interest rate to compensate them for lending their money for a longer timeframe.

2. Monetary policies

The Federal Reserve's monetary policy directly affects T- bill prices. An increase in the Federal Funds rate will tend to make other debt securities more attractive for investors, lowering the demand for T-bills.

As a result, regarding the direct relationship between the price level and demand for a commodity, lower demand for these bills will lead to a rise in its interest rate.

3. Inflation

A rise in the price level is also a factor in determining interest rates. Usually, when the inflation rate in a country is high, the interest rate on bills will also tend to increase. The same applies to periods of falling price levels, which will lead to a lower yield on bills.

Usually, when the inflation rate is higher than the T- bill discount rate, demand for those types of investments will fall since it becomes uneconomical to use them as investment vehicles. Lower demand will then tend to decrease the price of bills, raising their yield.

4. Risk tolerance

The degree of risk tolerance of investors also impacts the price of T-bills. 

If a country's economy is thriving, job opportunities are on the rise, and the inflation rate keeps decreasing, this will instill stability and safety from investors' perspective. This will encourage them to seek alternative, riskier investment strategies that yield higher returns.

Treasury bills vs. Treasury bonds

Treasury bills (T-Bills) and Treasury bonds are both fixed-income securities issued by the U.S. Department of the Treasury, but they differ in terms of maturity, yield, and investment characteristics.

Understanding the distinctions between T-Bills and Treasury bonds is essential for investors seeking to diversify their portfolios and manage risk effectively in the bond market. The differences are as follows:

Treasury bills

• T- bills are sold at a discounted cost and mature at face value
• They are negotiable debt instruments and highly liquid 
• They are issued as a promissory note or a paperless computerized framework
• T- bills' major players include banks, firms, individuals, and monetary foundations

Treasury bonds

• They are long term-investment bonds that are issued by the public authority to fund state-based projects
• They are a low-risk investment instrument, thereby paying a low return to their investors
• T-bonds ensure a specific rate of return from the investment
• The principal amount is paid alongside interest at the maturity date, and interest payments are made twice a year

From the above comparison and description of those two government securities, it is clear that bills differ from Treasury bonds in terms of time for maturity period.

T-bills and bonds are safer investments than other options since they are backed by a public authority. 

While T- bills are given at discounted cost and mature at face value, T- bonds pay interest twice a year. Moreover, no securities are issued for fundraising state projects.

How to Purchase Treasury Bills

Investing in Treasury bills (T-bills) offers a safe and accessible way to grow your money. In this guide, we'll explore the simple steps to purchase Treasury bills, providing you with the knowledge to start investing confidently:

Step 1: Open a CDS Account

The first step is to open a CDS account with the Central Bank, allowing them to monitor who holds which government securities. Once the CDS account is set up, the investor can invest in multiple bills and bonds.

To open a CDS account, the user should already have a bank account with the bank they intend to buy the bills from. The next phase is to collect a mandate card from the Central Bank or any branches and fill it in. 

In this document, the contact information and details of the user's bank account should be provided.

Accompanied with the mandate card should be passport-sized photographs of the person, which must be certified and stamped by a representative from their commercial bank. Lastly, a clear copy of the National Identity Card should be submitted.

Step 2: Select the way you want to invest

Since these bills are offered weekly, with maturities of 91 days, 182 days, and 364 days, the investor should choose from one of those options before getting started. The person must then decide on maturity length after researching recent interest rates.

This will give them a clear idea of the return on investment and how long they will have to commit their funds.

Step 3: Complete and Submit an Application Form

Once the person is committed to invest, they must complete a treasury bill application form, which includes information about the bill they intend to purchase. Information includes the maturity period, the face value amount they want to receive upon maturity, and the issue number.

The application form also contains the investor's personal information, such as names, telephone numbers, CDS account numbers, and the source of the funds being invested (local or offshore).

It is essential to note that those who are going for the competitive interest rate must ensure that the interest rates they are willing to receive don't exceed the cutoff rate imposed by the central bank since those who submit interest rates above the cutoff are not entitled to bills.

On the other hand, investors who choose the non-competitive rate are 100% entitled to receive the bills from the auction. The setback from this option is that they will always obtain lower returns than those who opted for the interest-competitive rate.

The last section of the application form is the rollover instructions. These are making it easier for existing investors to reinvest by using their returns to purchase additional government securities.

Step 4: Get the Auction Results

Following the application form submission, investors need to visit the central bank/central bank website to determine if their applications were accepted and see how much they owe for their bills.

Step 5: Payment

Next is to proceed with the payments of the bills. This can be done at the financial institution itself. 

It is vital to note that successful applicants who fail to execute the required payments shall be banned from undertaking future investments in government securities.

Advantages of Treasury Bills

Treasury bills (T-bills) offer several advantages for investors and governments alike. Here are some of the key advantages of investing in T-bills:

1. Safety and Security

Treasury bills are considered one of the safest investments available because they are backed by the full faith and credit of the government issuing them.

As they are issued by the government, the risk of default is extremely low, making T-bills an attractive option for conservative investors seeking capital preservation.

2. Liquidity

T-bills are highly liquid investments, meaning they can be easily bought and sold in the secondary market before their maturity date.

Investors can convert T-bills into cash quickly without incurring significant transaction costs, providing flexibility to adjust their investment portfolios as needed.

3. Fixed Income

T-bills provide a fixed income stream in the form of interest payments, which are typically paid at maturity. This predictable income stream can be attractive for investors seeking steady returns without exposure to market volatility.

4. Minimal Interest Rate Risk

Because of their short maturities, T-bills are less sensitive to changes in interest rates compared to longer-term bonds. This makes them less vulnerable to interest rate fluctuations and suitable for investors concerned about interest rate risk.

5. Tax Advantages

Interest income earned from Treasury bills is exempt from state and local income taxes, providing potential tax advantages for investors in high-tax jurisdictions. While T-bill interest is subject to federal income tax, it is often lower than the tax rate on other types of investment income.

Disadvantages of Treasury Bills

While Treasury bills (T-bills) offer numerous advantages, they also come with certain disadvantages that investors should consider. Here are some of the key disadvantages of investing in T-bills:

1. Low Returns

One of the primary drawbacks of T-bills is their relatively low returns compared to other investments such as stocks, corporate bonds, or longer-term government bonds. Also, T-bills have short maturities and low risk, they typically offer lower yields, which may not keep pace with inflation over the long term.

2. Inflation Risk

T-bills don't provide adequate protection against inflation. While they offer a fixed interest rate, this rate may not fully compensate investors for inflationary pressures over time. Inflation erodes the purchasing power of the interest income earned from T-bills, potentially reducing the real return on investment.

3. Reinvestment Risk

When T-bills mature, investors face reinvestment risk, especially if prevailing interest rates have declined. Investors may struggle to reinvest the proceeds from maturing T-bills at similarly attractive interest rates, potentially lowering future income and returns.

4. Interest Rate Risk

Although T-bills have short maturities, they are still subject to interest rate risk. If interest rates rise after purchasing T-bills, their market value may decline, leading to potential capital losses if investors need to sell them before maturity.

This risk is more pronounced for investors who buy T-bills in the secondary market rather than holding them to maturity.

5. Opportunity Cost

While T-bills offer safety and stability, they may not maximize long-term wealth accumulation compared to other investment options.

Uses of Treasury Bills

T-bills are short-term debt securities, issued by governments and serve various purposes in financial markets and the broader economy. Here are some of the uses of Treasury bills:

1. Short-term borrowing for the government: T-bills help the government meet immediate cash needs for its day-to-day operations, such as building necessary infrastructure, making payments for goods and services, and paying employee salaries.

2. Money market investment: T-bills are a popular investment option in the money market. They offer investors a low-risk investment with the full backing of the government. Moreover, they are issued at a discount to their face value and provide investors with a guaranteed return on investment at maturity.

3. Hedging against inflation: T-bills can be used as a hedge against inflation since they usually offer a higher return compared to inflation rates, protecting the investors' purchasing power.

4. Diversification: T-bills can be used as a low-risk investment option for diversifying an investment portfolio. They are often used in conjunction with equities and other more volatile investments to reduce overall portfolio risk.

5. Central bank's tool for monetary policy: Central banks use T-bills as a policy tool to manage monetary policy. Open market operations, where T-bills are bought and sold to regulate money supply, are used to control inflation and stabilize the economy.

6. Promissory notes with a repayment guarantee: T-bills are promissory notes with a repayment guarantee. Central governments issue these notes, and they are considered low-risk investments due to their stable return and backing by the issuing government.

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