With the slowdown in the economy, investors are looking for viable ways in which they can invest their money. There are investment options available but, which one should investors choose? With the majority of investors leaning to secure investment options such as Treasury Bills (T-Bills), what are T-Bills and how do they work? Alister Noel, senior manager, operations, at the Central Bank of T&T (CBTT), said T-Bills are short-term debt from the Government and are issued by the Central Bank on a three-month or six-month basis, so "it's short-term paper." A T-Bill, compared to a fixed deposit, means your money would be invested at a fixed rate for the fixed deposit. "A fixed deposit will tell you what you want to invest, say $10,000, this would be the interest rate (for example, 1.5 per cent). A T-Bill is what you will call a discount instrument, so there is no interest rate, but a discount rate," he said. Noel said if an investor decides to invest $10,000 in T-Bills, there is a purchase price: "the price the investor would pay to get $10,000 in six months' time and it will invariably be less than the $10,000.
"Instead of putting it as principal plus interest at maturity, you say it is principal minus the discount I (the investor) am going to pay, then at the end of the six months, I am going to get back the face value of the $10,000," Noel said. Noel defined discount: "On the face value, what discount you are going to take off to buy this T-Bill. It is not investing, but you are buying this T-Bill and not placing money with the CBTT, but I am buying a T-Bill," Noel said. With excess liquidity in the system, some large institutional investors are steering toward T-Bills. Noel said: "We would have had, at some point, in excess of $3 billion in excess liquidity with the CBTT. Those are funds the commercial banks could not place, therefore, they placed it with the CBTT to get zero per cent. You have plenty funds and you don't have places to put it." T-Bills, issued through auctions, are in demand because investors have money and are looking for places to invest it, Noel said.
"It is not a matter of bringing in your funds and placing it with us," he said. "It is a matter of showing interest." There are two categories of bids, competitive and non-competitive. The investor may say to himself, "you know what, I might not be as savvy or I am not keeping up with the interest rates in T&T to find out what would be a market interest rate today, but I would depend on the group of people who would be bidding on this T-Bill. "The investor may say I want to participate on a non-competitive basis, therefore, I would express my interest in that way" In other words, the investors bid and whatever the result, a portion is allocated for each investor at the particular price. The competitive bid means the investor has a "view" of the interest rates. The Central Bank defines T-Bills as "short-term government debt instruments with a maturity of up to 365 days. The T-Bills are issued by the Central Bank of T&T (CBTT), which acts as fiscal agent for the Government when the bills are issued." T-Bills are managed in accordance with the Treasury Bill Act, 1960. The Act allows the Government to borrow up to a specific ceiling.
In August 2006, the ceiling was raised from $5 billion to $15 billion. A portion of the Treasury Bills issue ($800 million or 5.333 per cent of the ceiling) is used for the Government's short-term borrowing needs. The balance of $14.2 billion, according to the CBTT, is "regularly auctioned among primary dealers, predominately commercial banks, for open market operations." An open market operation is a monetary policy used to "mop up or add liquidity to the financial system."
Having a ceiling will have impact: "One impact of the ceiling is that while the CBTT will be able to roll over T-Bills as they mature, it will be unable to issue additional amounts of securities. CBTT has relied on other monetary measures to mop up excess liquidity."
About T-Bills at a glance
Treasury notes are medium-term government debt instruments of more than one year and up to five years.
There is a legal limit of $5 billion for treasury notes which has been reached.
Treasury notes are used for open market operations.
