Welcome back to Ftalk. Today, I am going to provide a step-by-step guide on how to invest in Nigeria treasury bills. If you’re looking for safe ways to invest your money, you are in the right place.
Before we start, check out our recent post about validating your business idea in the Nigerian market.
What are Nigeria Treasury Bills?
Treasury Bills, or T-Bills for short, are short-term securities issued by the Central Bank of Nigeria and backed by the Nigeria government. They’re issued to borrow funds for a limited period, with a maximum maturity of 364 days.
T-Bills are different from short-term bonds, they provide lower yields but with less risk than high-risk investments like crypto assets, land banking or mini bonds.
If you’re looking for safe ways to invest extra money, consider treasury bills. They’re backed by the Nigerian government and can serve as both an investment and loan collateral. T-bills are great for disposable income and retirement planning. Plus, they’re easy to convert to cash when needed.
How does it work?
Treasury Bills are auctioned by the CBN every two weeks. Buyers submit bids, and the average minimum bid is chosen. The government sells these bills at a discount (below face value).
Investors then hold onto the T-Bills until maturity, when they receive the full face value. Face value, also known as par value, refers to the stated value of a security set by its issuer.
Why you should invest in Nigeria Treasury Bills
Safety:
Treasury bills are considered one of the safest investment options because they are backed by the government. Since they are issued by the government, there is virtually no risk of default, making them a low-risk investment choice.
Guaranteed Returns:
Treasury bills offer fixed interest rates, providing investors with predictable returns over the investment period. This makes them suitable for investors seeking steady income and capital preservation.
Liquidity:
Treasury bills are highly liquid investments, meaning they can be easily bought and sold in the secondary market before maturity. This provides investors with flexibility to access their funds whenever needed, making treasury bills a convenient option for short-term cash management.
Diversification:
Including treasury bills in a diversified investment portfolio can help spread risk and enhance overall portfolio stability. By investing in treasury bills alongside other asset classes such as stocks, bonds, and real estate, investors can mitigate risk and achieve a balanced portfolio.
Tax Advantages:
In many countries, the interest earned on treasury bills is typically exempt from state or local taxes, and in some cases, federal taxes as well. This tax advantage can enhance the after-tax return on investment compared to other taxable investments.
Capital Preservation:
Treasury bills are known for their capital preservation characteristics, making them suitable for investors who prioritize protecting their principal investment. With their low risk of default and guaranteed returns, treasury bills can help safeguard capital during uncertain market conditions.
Accessibility:
Treasury bills are widely accessible to individual investors through government auctions, financial institutions, and online brokerage platforms. This accessibility makes it easy for investors to participate in the treasury bill market and benefit from its advantages.
What to consider before investing T-bills
Lower Returns:
Compared to other investment options such as stocks or corporate bonds, treasury bills typically offer lower returns. The interest rates on treasury bills are often lower than the potential returns available from riskier investments, meaning investors may sacrifice higher potential gains for the safety and stability provided by treasury bills.
Inflation Risk:
Since treasury bills offer fixed interest rates, they may not keep pace with inflation over the long term. Inflation can erode the purchasing power of the returns earned on treasury bills, potentially resulting in negative real returns after accounting for inflation.
Lack of Capital Growth:
Unlike stocks or other equity investments, treasury bills do not offer the potential for capital appreciation. While treasury bills provide stable income through interest payments, they do not generate growth in the value of the initial investment.
Opportunity Cost:
Investing in treasury bills may involve an opportunity cost for investors who forgo potentially higher returns available from riskier investments. While treasury bills provide safety and stability, investors must weigh the trade-off between lower returns and higher risk associated with alternative investment options.
FAQs about Nigeria Treasury Bills
How can I buy nigeria treasury bills?
You can buy treasury bills from dealers or brokers licensed by the CBN or through banks’ treasury bill mobile apps. E.g i-investing, FBNQUEST, Cowrywise, Stanbicibtcbank etc.
What is the minimum amount I can buy?
The minimum investment in T-bills is typically ₦50 million. But if you don’t have that amount, you can invest through certain commercial banks for as little as N100,000.
These banks combine funds from multiple customers to meet or surpass the ₦50 million threshold and then invest on their behalf. The interest earned is distributed equally among investors according to their individual investments.
For instance, suppose you invested N100,000 in a collective investment that bought a 364-day T-bill offering a 10% interest rate. In this case, the bank would pay you N10,000 as your gross interest earned. Now, if your friend contributed N2 million to the same pool, they would receive N200,000 in return.
When is the interest on treasury bills usually paid?
The interest on T-bills is paid immediately upon initiation of the investment. If you buy a N200,000 T-bill with a 10% interest rate, the CBN debits your account by N180,000, providing you with upfront payment of N20,000 in interest. Upon maturity, you receive the full face value of N200,000.
Can I sell treasury bills before maturity?
Absolutely. Treasury Bills can be sold before they reach maturity through the Over-the-Counter (OTC) market. OTC trading involves the exchange of securities through a broker rather than on a major exchange.
Can I re-invest my treasury bill upon maturity?
The CBN doesn’t automatically renew your T-bills. Yet, you can arrange for rollover by reaching out to the bank where you initially invested and requesting reinvestment once the T-bill matures.
Are Treasury Bills Taxable?
Yes, Treasury bills are currently subject to taxation. In December 2011, the Federal Government of Nigeria introduced tax exemption orders on the interest earned from short-term securities like T-bills.
This order came into effect on January 2, 2012, with a duration of 10 years. As a result, now that this 10-year period has concluded, the interest earned on these securities is no longer exempt from taxation.
Are Treasury Bills Safe?
Indeed, Treasury Bills represent one of the safest forms of debt securities, with the full backing of the Federal Government of Nigeria.
How are T-Bills Different from Treasury Bonds?
T-Bills mature within a period of 91 days to 1 year, while Treasury bonds can extend up to 20 years. Unlike bond investors who receive payments every six months, T-Bill investors do not receive periodic interest payments.
What determines Nigeria Treasury Bill Price?
Inflation:
The prevailing inflation rate can also affect the value of T-bills. For example, if the inflation rate stands at 5% while the T-bill discount rate is 3%, investing in T-bills would be unprofitable as the real rate of return would be negative. Consequently, there would be reduced demand for T-bills, leading to lower prices in the market.
Maturity:
The maturity duration of a T-bill significantly influences its price. A bill with a one-year maturity will generate greater profits compared to a three-month one. Consequently, investors expect a higher return to offset the longer period their money is tied up.
Risk:
The price of a T-bill is also affected by investors’ risk tolerance. When the economy is growing and alternative debt securities offer higher returns, T-bills become less attractive and are priced lower. Conversely, during times of market and economic instability, when other debt assets are considered riskier, T-bills become more desirable and command a higher price because of their lower risk.
Overall, Treasury bills are widely regarded as one of the safest investment options, fully backed by the government. Investors keen on purchasing Treasury bills can do so through stockbrokers, banks, or directly from the CBN.
It offer a combination of safety, liquidity, and predictable returns, making them a compelling investment option for conservative investors seeking stability and income in their investment portfolio.
However, investors should carefully consider their investment objectives, risk tolerance, and financial goals before investing in treasury bills or any other financial instrument.
You can read more about the Nigerian Treasury bills on CBN officla website Frequently asked questions and CBN Security summaries
Till next time.
Cheers ❤️
