Even with lower rates, treasury bills are still a good buy

Treasury bill rates have been on a downward trend since the year started. The 91-day interest rate is currently 12.4% as at the time of writing compared to 14.1% at the start of the year. Because treasury bills are easy to purchase, liquid and relatively safe they are one of the most popular investments in the country. The fall in interest rates is therefore going to result in lower income for many investors and we are sure to see some movement from treasury bills into stocks and other investments. As a long-suffering investor in the Ghana Stock Exchange, I will be delighted to see more people invest in the stock market in order to help end the run of poor returns we’ve witnessed over the years. However, people should not rush to redeem their treasury bill investments and I will explain why.

Figure 1.1: 91-Day T-Bill Return compared to Inflation (January 2018 – Febuary 2021)

Figure 1.1 compares the 91-day treasury bill rate with inflation from January 2018 to February 2021. The gap between the two lines is the real return i.e. the return on treasury bills after considering inflation. The wider the gap, the more people are earning over the inflation rate. The chart shows that the gap is narrowing after a period in which the premium was quite large, but then it is only narrowing to early 2018 levels.

Figure 1.2: Real 91-Day T-Bill Return (Return after Inflation)

Figure 1.2 shows this phenomenon more clearly. After a large jump in the real return in mid-2019, we’ve seen a decline back to the 2018 levels. A possible explanation for this is mean reversion. After all, Ghana’s inflation was rebased in August 2019 which saw inflation drop from 9.4% to 7.8%. This is what accounted for the large jump in real return and we’re probably just seeing the real return go back to normal levels. But assuming we are indeed seeing a decline in real returns on treasury bills the solution is not to yank out all your money at once. Instead, it is a good time to see your disparate investments as a portfolio and to start managing it as such. You can get started by reading this and this. You can also reach out to me by sending an e-mail to jerome[at]ceditalk[dot]com so that I can explain further.


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