Treasury bills in Nigeria – Treasury bills, often abbreviated as T-bills, are short-term debt instruments issued by the federal government to finance its short-term borrowing needs. They are typically issued with maturities of one year or less, although some countries may issue T-bills with longer maturities.
Here are a few key characteristics of Treasury bills:
Issuer: T-bills are issued by the government, specifically the treasury department or central bank of a country. In the United States, for example, T-bills are issued by the U.S. Department of the Treasury.
Risk: Treasury bills are generally considered to be low-risk investments because they are backed by the full faith and credit of the government. This means that there is an extremely low probability of default.
Maturity: T-bills have short maturities, typically ranging from a few days to one year. They are issued at a discount from their face value, and the investor receives the full face value upon maturity.
The difference between the purchase price and the face value represents the investor’s return or yield.
Fixed interest rate: Unlike bonds, T-bills do not pay periodic interest payments. Instead, they are sold at a discount to their face value, and the investor earns interest by receiving the full face value at maturity. The difference between the purchase price and the face value represents the interest earned.
Liquidity: T-bills are highly liquid investments, meaning they can be easily bought and sold in the secondary market before their maturity dates. This makes them attractive to investors who seek short-term, low-risk instruments.
Use as a benchmark: Treasury bills are often used as benchmarks for other short-term interest rates, serving as a reference point for determining the cost of borrowing and lending in the financial markets.
How treasury bills work in Nigeria
Treasury bills are short-term debt instruments issued by the Central Bank of Nigeria (CBN) on behalf of the Nigerian government.
They are one of the investment options available to individuals, banks, and institutional investors in Nigeria.
Here’s how treasury bills work in Nigeria:
Issuance: The CBN conducts regular auctions to issue treasury bills with varying maturities, typically 91-day, 182-day, and 364-day tenors. These auctions are open to authorized dealers, including banks and other financial institutions.
Auction Process: Authorized dealers submit bids specifying the amount they are willing to invest and the discount rate they desire. The discount rate represents the investor’s return, as treasury bills are sold at a discount to their face value.
Competitive and Non-competitive Bids: Investors can place competitive bids or non-competitive bids. Competitive bidders specify their desired discount rate and compete against other bidders.
Non-competitive bidders accept the average discount rate of successful competitive bids.
Allocation: The CBN reviews all bids and accepts the most competitive bids first until the desired amount is raised.
Non-competitive bidders are allotted their desired investment amount. Successful bidders are issued treasury bills at the discount rate they specified.
Investment Period: Treasury bills have fixed investment periods corresponding to their maturities—91-day, 182-day, or 364-day. Investors hold the bills until maturity.
Interest and Returns: The return on treasury bills comes from the difference between the discounted purchase price and the face value paid at maturity.
For example, if an investor purchases a ₦1,000,000 treasury bill at a discount rate of 10%, they would pay ₦900,000 upfront and receive ₦1,000,000 at maturity, earning ₦100,000 (₦1,000,000 – ₦900,000) as interest.
Secondary Market Trading: Treasury bills can be traded on the secondary market before their maturity dates. Investors who wish to exit their investment early can sell their bills to other investors.
Liquidity: Treasury bills are considered relatively liquid investments. Investors can approach authorized dealers or the secondary market to sell their bills and convert them into cash before maturity.
Taxation: The interest earned on treasury bills is subject to withholding tax, which is currently set at 10%. This tax is deducted by the CBN before paying the investor’s returns.
Risk and Safety: Treasury bills are generally considered low-risk investments since they are backed by the Nigerian government. They are considered one of the safest investment options in the country.
Role of Treasury Bills in the Nigerian Economy
Treasury Bills play a significant role in the Nigerian economy as they are a crucial instrument used by the government to manage its short-term borrowing requirements, regulate the money supply, and control inflation.
Here are some key roles of Treasury Bills in the Nigerian economy:
Government Financing: The Nigerian government issues Treasury Bills as a way to finance its budget deficits. By selling these bills to investors, the government raises funds to meet its expenditure obligations, such as infrastructure development, social welfare programs, and public services.
Monetary Policy Tool: The Central Bank of Nigeria (CBN) utilizes Treasury Bills as a key instrument of monetary policy. Through open market operations, the CBN buys or sells these bills to influence the liquidity and money supply in the economy.
By adjusting the supply of Treasury Bills, the CBN can control inflation, manage interest rates, and stabilize the value of the national currency.
Risk-Free Investment: Treasury Bills are considered one of the safest investment options available in Nigeria. They are backed by the full faith and credit of the Nigerian government, making them virtually risk-free.
As a result, investors, including banks, pension funds, and individuals, consider Treasury Bills as a reliable avenue to preserve capital and earn guaranteed returns.
Liquidity Management: Treasury Bills help financial institutions, particularly banks, to manage their short-term liquidity needs.
Banks can invest their surplus funds in Treasury Bills, which provide a liquid and low-risk investment option.
This allows banks to maintain their required reserve ratios, meet their short-term obligations, and effectively manage their cash flows.
A benchmark for Pricing: Treasury Bills serve as a benchmark for pricing other short-term debt instruments in the Nigerian financial markets.
Their interest rates, which are determined through competitive auctions, influence the pricing of other money market instruments like commercial paper, certificates of deposit, and short-term loans.
This ensures a transparent and efficient pricing mechanism for short-term debt instruments.
Financial Market Development: The issuance and trading of Treasury Bills contribute to the overall development and deepening of the Nigerian financial market.
They enhance market liquidity, provide avenues for investors to diversify their portfolios, and attract both domestic and foreign participants.
The presence of a vibrant Treasury Bills market strengthens the overall stability and efficiency of the Nigerian financial system.
Key Features and Characteristics of Treasury Bills
Here are the key features and characteristics of Treasury bills:
Maturity: T-bills have a maturity period of one year or less. They are typically issued with maturities of 4 weeks (28 days), 13 weeks (91 days), 26 weeks (182 days), or 52 weeks (364 days).
Issuer: T-bills are issued by the government, specifically the Treasury Department or the central bank of a country, on behalf of the government.
Risk: T-bills are considered to be low-risk investments since they are backed by the full faith and credit of the government. This means that the government guarantees the payment of the principal amount and the interest earned on the T-bills.
Interest: T-bills are issued at a discount from their face value, and the difference between the purchase price and the face value represents the interest earned. For example, if a T-bill with a face value of $1,000 is issued at a discount price of $990, the investor earns $10 as interest upon maturity.
Liquidity: T-bills are highly liquid instruments. They can be bought and sold in the secondary market before their maturity date, allowing investors to access their funds if needed.
The secondary market for T-bills is active and usually includes banks, financial institutions, and individual investors.
Non-interest bearing: T-bills do not pay periodic interest payments like traditional bonds or notes. Instead, the interest is earned upon maturity when the T-bill is redeemed at its face value.
Investment size: T-bills are typically issued in denominations of $1,000 or multiples thereof, making them accessible to a wide range of investors.
Taxation: The interest earned on T-bills is subject to federal income tax but exempt from state and local taxes. However, interest on T-bills is generally subject to taxation when held by non-resident individuals or entities.
Safe-haven status: T-bills are often considered safe-haven investments during times of economic uncertainty or market volatility. They are perceived as low-risk assets due to the backing of the government.
Competitive bidding: T-bills are typically sold through an auction process where investors submit bids specifying the discount rate they are willing to accept. The Treasury accepts the bids starting from the lowest rates until the total amount of T-bills being auctioned is reached.
Types of treasury bills in Nigeria
There are three main types of Treasury Bills in Nigeria, categorized based on their maturity periods:
91-Day T-Bills: These bills have a maturity period of 91 days (approximately three months). They are the shortest-term T-Bills and typically offer the lowest yields among the three types. Investors who prefer short-term investments or require liquidity within a short period often invest in 91-day T-Bills.
182-Day T-Bills: These bills have a maturity period of 182 days (approximately six months). They offer a slightly higher yield compared to 91-day T-Bills but are still considered relatively short-term investments. Investors who seek a balance between yield and liquidity often consider investing in 182-day T-Bills.
364-Day T-Bills: These bills have a maturity period of 364 days (approximately one year). They offer the highest yields among the three types of T-Bills due to their longer-term nature.
Investors looking for higher returns and are willing to commit their funds for a longer duration often opt for 364-day T-Bills.
T-Bills in Nigeria are typically sold through auctions, where investors
submit bids specifying the amount they are willing to invest and the interest
rate they desire.
The CBN then determines the cut-off rate based on the bids received, and successful bidders are allocated T-Bills at that rate.
Investors can hold T-Bills until maturity or sell them on the secondary
market before maturity if they wish to access their funds earlier.
The interest earned on T-Bills is paid upfront, and the difference between the face value and the discounted purchase price represents the investor’s return at maturity.
Eligibility and Requirements for Investing in Treasury Bills in Nigeria
To invest in Treasury Bills in Nigeria, you need to meet certain eligibility criteria and fulfill specific requirements.
Here are the general guidelines:
Individual Investors: Nigerian citizens, resident foreigners, and corporate bodies are eligible to invest in Treasury Bills.
Minimum Age: The minimum age requirement for individual investors is usually 18 years and above.
Central Securities Clearing System (CSCS) Account: You must have a CSCS account, which is a central depository for holding and settling securities in Nigeria. It is required for the electronic transfer and registration of Treasury Bills.
Know Your Customer (KYC) Documentation: You will need to provide the necessary KYC documents, which typically include a valid means of identification (e.g., National Identity Card, International Passport, or Driver’s License) and proof of address (e.g., utility bill or bank statement).
Treasury Bill Account: You will need to open a Treasury Bill account with a designated authorized dealer (commercial bank) that offers Treasury Bill investment services.
Minimum Investment Amount: The minimum investment amount for Treasury Bills varies but is typically around N10,000 – N100,000. Some banks may require a higher minimum investment.
Application Process: To invest in Treasury Bills, you need to submit a duly completed Treasury Bill application form, available at authorized dealer banks.
The form will require your personal information, account details, desired investment amount, and tenor (the duration for which you want to hold the Treasury Bills).
Auction Process: Treasury Bills are typically sold through a competitive auction process conducted by the Central Bank of Nigeria (CBN). You may need to specify your bid rate or accept the prevailing rate at the auction.
Factors to Consider Before Investing in Treasury Bills
Before investing in Treasury bills, there are several factors you should consider. Treasury bills (T-bills) are short-term debt instruments issued by governments to raise funds.
Here are some key factors to keep in mind:
Risk: Treasury bills are generally considered low-risk investments because they are backed by the government. However, it’s essential to understand that no investment is entirely risk-free.
While the risk of default is minimal, T-bills are still subject to interest rate risk and inflation risk.
Investment Horizon: T-bills have various maturity periods, typically ranging from a few days to one year. Consider your investment time frame and align it with the appropriate maturity period.
If you have short-term liquidity needs or a specific financial goal with a short time horizon, T-bills might be suitable.
Return on Investment: Treasury bills are considered to be relatively low-yield investments compared to other options. The interest rates on T-bills are typically lower than those on long-term government bonds or riskier assets.
Evaluate the prevailing interest rates and compare them with other investment opportunities to determine if T-bills align with your return expectations.
Liquidity: T-bills are highly liquid instruments, which means they can be easily bought and sold in the secondary market.
If you anticipate needing quick access to your funds before the maturity date, T-bills offer the advantage of liquidity.
Tax Considerations: Understand the tax implications of investing in Treasury bills. The interest earned on T-bills is subject to federal income tax but exempt from state and local taxes.
Consult with a tax advisor to determine how T-bill income will be treated in your specific situation.
Diversification: T-bills can be a valuable component of a diversified investment portfolio. However, it’s important to consider the overall asset allocation and ensure that your investments align with your risk tolerance and long-term goals.
Market Conditions: Keep an eye on the prevailing economic and market conditions. Factors such as interest rate trends, inflation expectations, and the overall economic outlook can influence the attractiveness of T-bills as an investment option.
Investment Objectives: Assess your investment goals and risk tolerance. Treasury bills are primarily used for capital preservation and short-term cash management.
If your objectives align with these characteristics, T-bills may be suitable for you.
How to Invest in Nigerian Treasury Bills
Investing in Nigerian Treasury Bills (NTBs) involves purchasing short-term government securities issued by the Central Bank of Nigeria (CBN).
These bills are considered a low-risk investment option and provide a fixed return over a specified period.
Here’s a step-by-step guide on how to invest in Nigerian Treasury Bills:
Open a Bank Account: To invest in NTBs, you need to have a bank account with a Nigerian bank. If you don’t have one, visit a bank branch of your choice and open an account.
Ensure you have the necessary identification documents required by the bank.
Obtain a Bank Verification Number (BVN): The BVN is a unique identification number issued by the Nigerian government to all bank customers.
It is a mandatory requirement for opening and operating a bank account in Nigeria. Make sure you have a BVN before proceeding.
Research and Select a Bank: Not all banks in Nigeria offer NTB investment services to individuals. Research and select a bank that offers this service.
You can check the websites of various banks or contact them directly to inquire about their NTB investment offerings.
Provide Required Documentation: Each bank may have specific requirements for investing in NTBs. Generally, you will need to provide the following documents:
- Valid identification documents (e.g., national ID card, international passport, or driver’s license).
- Proof of address (e.g., utility bill or bank statement).
- Bank account details.
Visit the Bank: Once you have chosen a bank, visit the branch and ask to speak with an investment officer or relationship manager.
Inform them of your interest in investing in NTBs and provide the required documents. They will guide you through the process and assist with the necessary paperwork.
Complete the Application Form: The bank will provide you with an application form for investing in NTBs. Fill out the form accurately and provide all the required information.
Indicate Investment Amount and Tenure: On the application form, specify the amount you want to invest in NTBs and choose the desired investment tenure. Treasury Bills are usually issued for periods ranging from 91 days to 364 days.
Submit the Application: After completing the application form, submit it to the bank along with any required supporting documents.
Funding the Investment: Transfer the invested amount from your bank account to the dedicated NTB investment account provided by the bank. The bank will guide you on how to make the transfer.
Monitor Your Investment: Once your investment is made, keep track of the maturity dates and interest payments. Treasury Bills typically pay interest every three months until maturity.
Redeem or Roll Over: At maturity, you have the option to redeem your investment or roll it over for another period. If you choose to roll over, inform your bank before the maturity date.
How much interest is on treasury bills in Nigeria?
Nigeria Treasury Bill Rate: 364 Days data was reported at 11.465 % pa in Dec 2022. This records a decrease from the previous number of 14.330 % pa for Nov 2022.
Nigeria Treasury Bill Rate: 364 Days data is updated monthly, averaging 10.287 % pa from Jan 2008 to Dec 2022, with 178 observations.
Which is better, fixed deposit and treasury bill in Nigeria?
Service fees and tax benefits
Treasury bills have the advantage of being tax-free; however, you will be obliged to pay a bank fee for the services given.
Fixed deposit interest is taxable on an annual basis, so the interest paid to the depositor is subject to a 10% withholding tax.
What happens when a treasury bill matures?
When a treasury bill (T-bill) matures, it means that the specified period for which the T-bill was issued has come to an end.
At maturity, the holder of the T-bill is entitled to receive the full face value (also known as the par value or principal) of the bill from the government.
Here’s a step-by-step breakdown of what happens when a treasury bill matures:
Notification: Typically, the government or the issuing authority will notify the holder in advance about the impending maturity of the T-bill. The notification may include details such as the maturity date, face value, and instructions for redemption.
Redemption: On the maturity date specified, the holder can go to the issuing authority (such as a bank or the Treasury Department) and present the T-bill for redemption.
The issuing authority will verify the authenticity of the T-bill and the ownership of the holder.
Payment: Once the verification process is complete, the issuing authority will pay the holder the full face value of the T-bill.
The face value is the amount initially invested by the holder and is typically paid in cash or credited to the holder’s designated bank account.
Taxation: It’s important to note that the interest earned on treasury bills is subject to federal income tax but exempt from state and local taxes.
The issuing authority may provide the necessary documentation (such as Form 1099-INT) for the holder to report the interest income on their tax returns.
Reinvestment or Withdrawal: After receiving the payment for the matured T-bill, the holder has the option to reinvest the funds in another T-bill or any other investment vehicle. Alternatively, they can choose to withdraw the funds and utilize them as desired.
How do I sell my T-bills in Nigeria?
To sell your T-bills in Nigeria, you can follow these general steps:
Open a Treasury Bill Account: If you don’t already have one, you’ll need to open a Treasury Bill account with a licensed primary dealer or a commercial bank in Nigeria.
These institutions act as intermediaries between investors and the Central Bank of Nigeria (CBN) for T-bill transactions.
Contact Your Primary Dealer or Bank: Get in touch with your primary dealer or the bank where you have your Treasury Bill account. Inform them of your intention to sell your T-bills and inquire about their specific process for selling.
Provide Necessary Information: The primary dealer or bank will typically require specific information to process your T-bill sale. This may include your Treasury Bill account details, identification documents, and other relevant information they may request.
Submit Sell Order: Once you have provided all the required information, you can submit a sell order specifying the amount and maturity date of the T-bills you wish to sell.
Review and Confirm Transaction: The primary dealer or bank will review your sell order and confirm the details with you. They may also provide you with the current market rates for T-bills.
Receive Payment: After the sale is confirmed, the proceeds from the sale will be credited to your Treasury Bill account or another designated account linked to your T-bill holdings.
Settlement: The settlement period for T-bill transactions in Nigeria is usually T+1, which means the funds should be available in your designated account within one business day.
What are the minimum and maximum investment amounts?
The minimum and maximum investment amounts in treasury bills in Nigeria are as follows:
Minimum Investment Amount: The minimum investment amount for treasury bills in Nigeria is typically set at ₦50,000 (Fifty Thousand Naira). This means that individuals or entities interested in investing in treasury bills must invest at least ₦50,000 or higher.
However, some banks may start with as low as N10,000.
Maximum Investment Amount: The maximum investment amount for treasury bills in Nigeria is not explicitly defined by the Central Bank of Nigeria (CBN) or the Debt Management Office (DMO).
However, there may be certain limits imposed by individual banks or financial institutions through which the investments are made.
These limits can vary depending on the institution and the specific terms and conditions of the investment.
Can foreign investors participate in the Treasury Bills market?
Yes, foreign investors can participate in the Treasury Bills (T-Bills) market of a country, subject to the regulations and policies of that particular country.
The availability and specific requirements for foreign investors may vary from country to country.
In many countries, including the United States, foreign investors are allowed to invest in Treasury Bills. The process usually involves opening an account with a financial institution that has access to the T-Bills market, such as a bank or a brokerage firm.
The investor may need to provide certain identification and documentation as required by the country’s regulations.
It’s important to note that foreign investors may face additional restrictions or requirements compared to domestic investors.
These restrictions could include limitations on the amount they can invest, residency requirements, or regulatory approvals.
Some countries may also have specific regulations to monitor and control foreign investment flows in their T-Bills market.
What happens if I need to sell my Treasury Bills before maturity?
If you need to sell your Treasury Bills before their maturity date, you have the option to do so in the secondary market.
The secondary market refers to the market where already-issued securities are traded among investors, rather than buying directly from the government in the primary market.
When you sell Treasury Bills before maturity in the secondary market, the actual price you receive will depend on several factors, including the prevailing interest rates, the time remaining until maturity, and the demand for Treasury Bills at that particular time.
If interest rates have risen since the time you purchased the Treasury Bills, the price of your bills in the secondary market will likely be lower than their face value (also known as a discount).
Conversely, if interest rates have fallen, you might be able to sell them at a premium.
It’s important to note that Treasury Bills are highly liquid and considered relatively safe investments, as they are backed by the full faith and credit of the government.
However, fluctuations in interest rates and market conditions can affect their value. The price you receive when selling your Treasury Bills before maturity may be different from the amount you initially invested, either higher or lower.
To sell Treasury Bills in the secondary market, you can work with a broker or financial institution that deals in government securities.
They can help facilitate the transaction and find potential buyers for your Treasury Bills. Keep in mind that there may be transaction costs or fees associated with selling your bills before maturity, so it’s essential to consider these factors when deciding to sell.
Investors can hold T-Bills until maturity or sell them on the secondary market before maturity if they wish to access their funds earlier.
The interest earned on T-Bills is paid upfront, and the difference between the face value and the discounted purchase price represents the investor’s return at maturity.