Treasury bills (T-bills) are among the most popular investment instruments in the country. But despite the high demand for them, a lot of people do not have a good idea of what they actually are. In this post I will explain what T-bills are, how the return on them is determined and the advantages and disadvantages of having them in your portfolio.
What are T-bills?
Treasury bills are short-term loans that the government takes to finance various operations. In Ghana, the maturity of T-bills are 91-days and 182-days with each of them offering a different return. Because T-bills are guaranteed by government, it is considered a risk-free investment and therefore it is usually used as a benchmark for determining the value of any investment. If an investment offers you returns lower than a T-bill, then you probably would not want to invest in it.
How are T-bill rates determined?
The government issues T-bills through auctions. The auctions are not open to the general public. They are only available to primary dealers. These are financial institutions which are permitted by the Bank of Ghana (BoG) and licensed by the Securities and Exchange Commission (SEC) to buy government securities issued by the BoG. Click here for the list of primary dealers in Ghana.
The government issues the T-bills worth a certain value (known as the face value) to be redeemed within 91 or 182 days (the maturity period) and the dealers bid to buy the T-bills at a price lower than that face value. This is called buying at a discount. The difference between the price which the dealers pay for the T-bill and the face value of the T-bill is the interest. For example if a dealer buys a T-Bill with a face value of GH¢1,000 at GH¢900, then the difference of GH¢100 is the interest earned on the investment. At the end of each auction, the average of the bids determines the T-bill rate which is published on the BoG website.
How do individual investors buy T-bills?
If you could not get your head around the preceding section, do not worry. It is irrelevant for individual investors. Most financial institutions offer T-bills to the general public with minimum purchases of about GH¢100 or GH¢200. You can choose to purchase it for 91 days or 182 days, with the 182-day version having a higher interest rate because of the longer maturity period. You will have the option to have your principal and interest deposited in your account at maturity; have the interest deposited in your account and the principal rolled over (re-invested in T-bills); or have the interest added to your principal and the total rolled over. Many financial institutions offer you the opportunity to redeem your investment before maturity. Be sure to ask about this before buying, in case you may need to withdraw money for an emergency.
Advantages of T-bills
No risk of losing your investment (as long as the government does not collapse).
It is liquid i.e. it is usually easy to redeem your investment whenever you need it.
No fees. You are usually not charged investment fees when you buy T-bills.
No taxes. Returns on your T-bills are not taxed in Ghana.
Easy to buy. Your bank probably offers it.
Low volatility. Treasury bill rates rise and fall less wildly than other investments e.g. stocks.
You feel like you are contributing to help the country develop. (Debatable lol)
Disadvantages of T-bills
Relatively low returns. It is risk-free so do not expect to earn exceptional returns on this. This is not always true but it is usually true over long periods compared to other assets.
Returns are not fixed. Since the rates are determined by auctions, you could have your T-bill rolled over at a rate lower or higher than your initial purchase.
It draws investment from the stock market. One reason why the Ghana Stock Exchange (GSE) sees low volumes is because T-bills are usually the first option for many investors.
It makes borrowing costs high for businesses. T-bill rates in Ghana are usually high and this draws banks to invest in them to the detriment of businesses looking for credit.
Everybody buys them. If you buy T-bills then you do not stand out as investor. I have written before that one should not care that an investment isn’t sophisticated. But it apparently bothers some people that they are doing something everyone else is.