This article briefly describes what t-bills are and how they work. It illustrates benefits that can accrue from this low-risk and low return investment vehicle that ranks among the safest global instruments available for investors.
What are t-bills?
Definition A Treasury bill or t-bill is a short-term investment vehicle through which the government borrows money from investors and pays back within a year. Across the globe, they tend to have maturity periods of one month to one year depending on the country. Investors usually buy treasury bills at discounted rates and redeem them at face value, giving the state the opportunity to fund some of its operations. Investors Unlike conventional treasury bonds that attract a fixed interest rate from the borrowing government, investors buy t-bills through a bidding process at discount rates below the face value. At the same time, t-bills are only redeemable upon expiry and do not attract regular payments like t-bonds and other coupons. In most countries, both residents or non-resident individuals and corporate bodies can invest in t-bills provided they have a legal relationship with a local commercial bank or Central Bank. Since the investment vehicle improves government funds, the restrictions are usually minimal in capitalist economies. Fiscal authorities therefore seek to improve their country’s credit ratings through stable economic performance to attract as many local and foreign investors whenever they float t-bills and t-bonds.
How do they work
Competitive bidders Investors usually apply for t-bills at a central bank as either competitive or non-competitive bids. The competitive bidders indicate their preferred price based on their interpretation of interest rates and market fluctuations. However, these bids may be accepted or rejected depending on the prevailing economic conditions. The non-competitive bidders, on the other hand, can place average bids because their request gets guarantee but with a ceiling on how much they can invest. Those investors who prefer not to hold their government securities to maturity have the option of selling back their investment to the central bank. This move may result in losses with refund amounts usually calculated based on a formula that varies from country to country. In essence, central banks try to make it as punitive as possible to the investor to discourage this practise. Once the maturity date arrives, the investor can choose to rollover their funds into a new round of t-bill issues or alternatively, they can redeem their investment and enjoy the benefits.