Oran Hall | Understanding treasury bills

Treasury bills are government short-term debt instruments issued through the Bank of Jamaica. They serve the double purposes of helping to fund government spending and manage liquidity in the market, while providing a means for investors to earn income from a safe and relatively liquid instrument.

Unlike other forms of interest-earning securities, they do not carry a stated interest rate. They trade on a discount basis and the return is the difference between the discounted value and face value, which is the value at maturity.

Trading at a discount means that the investor pays less than $100 for every $100 of the instrument – $92 – for example. Maturing at face value or par value means that the investor gets $100 at maturity, thus earning $8 on every $92 in this example. The yield, therefore, is calculated on the discounted value, which really is the cost to the investor.

Although treasury bills do not pay interest in the traditional sense, they do generate income, which is taxable, as the government does not see the returns as capital gains – which is not taxable – as some investors tend to believe.

In Jamaica, they are issued monthly by the Bank of Jamaica through a tender process in which the bid with the highest price and lowest yield is allotted first. Thus, it is possible for bids to be rejected.

They are issued with maturities of about 30, 90, 180, 270 and 365 days generally, and auctions are usually held in the very early days of the month. The BOJ may have additional tenders in its efforts to manage liquidity. By taking money out of the hands of the public, it reduces their immediate capacity to spend, which can be useful in reducing the demand for foreign currency, there being fewer Jamaican dollars to fund the demand. In this way, the value of the Jamaican dollar can be protected.

Investors wishing to purchase treasury bills often engage stockbrokers to place bids for them at a cost. It is also possible to buy or sell them in the secondary market through the stockbrokers, who buy and sell for their own account, but also act as middlemen for people who desire to buy or sell the securities.

Generally, the Bank of Jamaica publishes its upcoming treasury bill tenders in the press and on its web site, so the public can know when to buy new bills. The BOJ also publishes the results of the auctions. They show the date the bids were opened, the amount of money the BOJ was seeking, the issue date, the maturity date, the amount the public applied for, the average yield, the full allotment price and yield (usually a range), the percentage of the bids that did not get 100% of what was applied for, the price, and yield.

Although the report gives a global view of the treasury bill auction, it is clear that the range of bids can be quite wide. Following from this is that an individual investor may invest in treasury bills of several maturities at any one time if there are multiple issues, or may bid for a single maturity at different rates by dividing the funds accordingly. The investor has choices but may benefit from guidance by the stockbroker.

Treasury bills are not listed on the stock exchange so they trade on the over-the-counter market on a yield basis. This means that trades may not bear any significant relationship to the price at which the bills were bought initially. In effect, it is current yields which tend to dictate the rate at which current transactions are done.

If, for example, an investor bought a 180-day treasury bill to yield 7% and wished to sell it 90 days later, but treasury bill yields increased in a later tender, it would cause the buyer in the secondary market to expect a yield in line with the most recent 90-day rate, so that would be the basis on which the yield and price would be determined.

Like other money market securities, such as repurchase agreements, treasury bills are a good alternative to savings and deposit accounts. The major drawback is that the fee the brokers charge may make that type of investment less attractive.

The public may often benefit from treasury bills without knowing. For example, pension funds often invest in them, so the members of pension funds derive a benefit. Additionally, people who invest in unit trusts and mutual funds also benefit, particularly those who invest in money market funds, as well as people who own equity-linked life insurance policies and, in fact, other types of policies.

Treasury bills may seem more complex than other short-term investment instruments, but they can be useful to investors interested in generating safe short-term income.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com