How to invest in treasury bills with low funds

Author of ‘How to invest in treasury bills’ and personalfinance coach, Mr. Usiere Uko, writes about how to invest in treasury billsunder the new Central Bank of Nigeria minimum requirement of N50m

The minimum investment in Nigerian treasury bills has beenincreased from N10,000 to N50m with effect from March 6, 2017. I have receivedenquiries about what the average investor with less than N50m is supposed to doin this scenario. Many see it as a conspiracy by the rich to edge out the poorfrom the treasury bills primary market. The announcement itself came as afootnote prior to the current announcement of the Federal Government savingsbonds with minimum investment of N5,000 only, with a tenor of two/ three yearsand interest paid quarterly. I do not know the basis for this decision since itwas not explicitly stated and I do not intend to speculate.

Since this directive is in effect, it means submitted bidsfor the Wednesday, March 15, 2017, primary auction will be in line with thisdirective. Since I do not believe in crying over spilt milk, I will go ahead tosuggest ways investors with less than N50m can still invest in treasury bills.

The secondary market

If you have been investing in treasury bills for a while,you may be aware of a secondary market where holders of treasury bills issuedfrom the primary market (auction) can resell without holding to maturity. Thismeans the tenor of treasury bills you get to buy is based on the remaining tenoron the bill. For example, if someone bought a 182-day tenor treasury bills at15 per cent and holds for 12 days before deciding to sell, you will be buying a170-day tenor bill (since 12 days has elapsed) at an agreed rate, usually below15 per cent.

The secondary market was already active before this policycame into effect. Brokers buy treasury bills  ‘wholesale’ and sell‘retail’ to end users. With such a large number of investors now unable toaccess the primary market due to the high entry requirements, brokers will seethis as an opportunity to buy even more treasury bills from the primary marketand resell at the secondary market, since the demand is now much larger. Ineffect, the policy is moving demand from the primary market to the secondarymarket. It will also be good business for brokers as each transaction will beat a profit. Using the previous example, you may be offered the bills at 13 percent, which leaves a two per cent profit margin for the broker.

So, in effect, you are getting at a lower rate (ratherthan nothing at all), but there are also some advantages. You can simply go toa broker and buy instantly without having to wait for the bi-weekly auction.The issue of an unsuccessful bid does not arise because you get to buy what isavailable on the spot. Also, you may not be charged custodian fees, hence youpay lower transaction fees. Each broker will have their minimum subscriptionamount, so you need to find out which broker suits your portfolio size.

Money market mutual funds

You can also invest in treasury bills indirectly byinvesting in treasury bills linked to money market mutual funds. The brokerbuys treasury bills and bonds using pooled investors funds and allocatesinterest periodically (monthly etc.) and also charges management fees. The rateyou get here will be lower than the primary and secondary market (due tomanagement fees etc.), but you will get higher returns compared to other moneymarket instruments.

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One key advantage is that it has a very low entry point.Some brokers accept as low as N2,000 or N5,000 per month. Since subscription ismonthly, you are forced to develop a savings habit which also helps you buildup your pool of funds which you can use to invest in the secondary market lateron as you desire. Again, each broker has a minimum subscription amount, so youneed to do your own investigation to find out which broker works best for you.

Primary market through pooledfunds

Some brokers may have an arrangement whereby someinvestors can pool funds together to make up the N50m minimum requirement andinvest directly through the primary market. The modalities may differ. Since itis pooled funds, the broker may have to go with the house bid rate when makinga bid. That means you have no say over the submitted bid rate since your moneyis just a small portion of the whole.

This will also work for cooperatives, investment clubs,group of friends, etc. This arrangement gives the investor more say over thebid rate since you know yourselves and can come together to decide which rateto bid.

Please note that there will also be a minimum amountallowed, especially by brokers. It may be in the range of N500,000 or N1m andabove. For the average man with small funds, a cooperative that also invests inthe money market will work better. Part of your monthly contributions will beinvested in treasury bills and the interest shared as profit at the end of theaccounting year. The same may apply to investment clubs if they have enoughmembers.

Keep learning

Financial education, as any other field, is a never endingjourney. School is never out for the person who wants to succeed in allseasons. Things change along the line, as we have just witnessed and you needto be informed and have enough education to adjust and change with the changingtimes.

For questions, comments orenquiries you can contact him at usiere@gmail.com,www.financialfreedominspiration.com. Follow me on twitter @usiere, BBMC002B2697