The Central Bank of Nigeria (CBN) has been implementing several measures in response to ongoing economic challenges. These measures reflect the CBN’s efforts to address inflationary pressures, exchange rate volatility and foster a stable economic environment.
One of these measures is the plan of the CBN to mop money from circulation and also attract foreign investors at an impressive rate. The CBN during the latest treasury bill auction on March 6, 2024, offered approximately N1.3 trillion across three different tenors. The auction yielded varying stop rates: 21.49% for the 364-day tenor, 18% for the 182-day tenor, and 17.24% for the 91-day tenor. Notably, the 21.49% rate marks the highest since its peak at 18.830% per annum in April 2017.
Although treasury bill rates do not match the 29.9% inflation rate as of January 2024, they remain a viable investment option for portfolio diversification given their relative safety.
So, what exactly are treasury bills, and how can you access them?
What are Treasury Bills?
Treasury bills, or T-Bills, are short-term debt securities issued by the government to address budget deficits and finance projects. Before a treasury bill auction, an advertisement is typically published in national newspapers, inviting bids from potential investors.
In Nigeria, T-Bills are issued by the Central Bank of Nigeria (CBN) on behalf of the federal government. This investment is supported by the full faith and credit of the Federal Government of Nigeria (FGN), making it one of the safest investment options available.
Maturity: Treasury bills have maturity periods of 91, 182, and 364 days. Upon maturity, the face value of the treasury bills is automatically repaid to the investor’s account by the CBN through an authorised dealer, such as banks and investment brokers. Treasury bills are known for their high liquidity, giving investors the option to sell them before the maturity date. However, selling treasury bills before maturity may involve rediscounting, which typically reduces their value and may result in a loss of the earned interest.
How Treasury Bills Trading Works in Nigeria
Treasury bills auction: The trading of treasury bills in Nigeria operates through a Dutch auction system. This system involves collecting all bids for an item and then determining the highest price at which the item can be sold. During the auction of treasury bills, bidders specify the discount rate they are willing to pay for each tenor of the bills. The Central Bank of Nigeria (CBN) accepts the lowest bids first, gradually increasing until it meets the total amount it aims to raise for the issued treasury bills. The final rate chosen by the CBN, known as the stop rate, becomes the maximum discount price. Bids equal to or lower than the stop rate are accepted, while those above it are rejected. Investors whose bids fall below the stop rate receive the rate they bid at.
For instance, assuming the CBN receives the following quotes for a 364-day tenor:
N50 million at 5.85%
N60 million at 5.98%
N50 million at 6%
N70 million at 6.25%
N75 million at 6.47%
N80 million at 6.95%
N85 million at 7%
N90 million at 8%
If the CBN aims to raise N300 million for a single T-bills issue after receiving the quotes above, it will accept the lowest bids until a total of N300 million has been accepted which will fall within the 6.47% bid. However, only N70 million will be accepted from this bid, while bids higher than this will be rejected. All bidders including those with initially lower bids will receive a discount rate of 6.47%.
Where Can Treasury Bills Be Bought?
Treasury bills are sold in two ways in Nigeria:
- Primary market: Purchases are made directly from the CBN and require a minimum sum of N50 million. Buyers in the primary market can only acquire treasury bills when there is a new issue from the government.
- Secondary market: Treasury bills are bought through authorised dealers such as banks, discount houses, and stockbrokers. In the secondary market, previously issued bills are traded and can be purchased or resold at any time. However, the tenors of T-bills traded in the secondary market are typically shorter than their original tenors.
How Are Interests on Treasury Bills Paid in Nigeria?
Treasury bills are sold at a discount value and carry a fixed interest, which is the difference between the purchase price of the bill and its value at maturity. For instance, if an investor buys treasury bills worth N100,000 at a discount price of 10%, they only pay N90,000 at the time of purchase. However, at maturity, they receive the full face value of N100,000, thus earning N10,000 in interest.
Benefits of Treasury Bills Trading in Nigeria
- Income from investments is tax-free.
- Government-backed with zero default risk.
- Low minimum investment value of N100,000. You can even invest lesser amounts on some investment apps.
- Treasury bills offer high liquidity and can be bought or sold at any time in the secondary market.
- Fixed and guaranteed income.
- Now that you know what a treasury bill is and how you can access it, would you consider adding it to your portfolio?
- If you’re interested in this or need a more tailored investment portfolio that fits your risk appetite, then send an email to sales@themoneyafrica.com.
***
Would you like to know the state of your finances?
Take this test to see how you are doing financially
***
Do you know that we have our own podcast? It’s MONEYTALKS!💚
Here’s a link to listen to all the amazing episodes we have!
***
Thank you for reading Money Africa’s Blog.
Please feel free to share it.
Do you have any questions? You can send an e-mail to info@themoneyafrica.com or send a DM to any of our social media channels.
***
MoneyAfrica premium plan
Are you a mid to high-income earner? Do you find communities a bit too busy? You should sign up for our premium plan.
You can learn more about that here.
***
We often get questions regarding how to plan your finances to align with your relocation plans, especially for students seeking to further their studies. As always, we have heard you, and we have put together an e-book to help you navigate this. Follow this link, to get your FREE copy of the e-book: The Japa Encyclopedia.
***
Get our annual subscription and learn more about investing safely and building a solid portfolio in 2024.
Don’t forget to:
- Join our community, if you want to smash your 2024 financial goals. It takes at least 30 days to build great habits that will last you a lifetime. So why not start now? There is a lot you can achieve.
- If you would like to document your financial journey in 2024, then our journal would be an excellent fit for you. It costs ₦7,500 (excluding delivery).
- Get a budget sheet to track your monthly expenses. Click here
- Get an investment tracker to be on top of all your investments. Click here
MoneyAfrica is a financial literacy platform. Our goal is to make everyone better with their finances.
We do this by engagements via our:
– social media handles
– platforms for paid community members (for adults and students)
– webinar sessions with corporate clients
Would you like to join any of the communities? Please click here
Would you like us to hold a webinar for your company’s staff? Please send an email to info@themoneyafrica.com
