How to invest in treasury bills with low funds

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

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

Since this directive is in effect, it means submitted bids for the Wednesday, March 15, 2017, primary auction will be in line with this directive. Since I do not believe in crying over spilt milk, I will go ahead to suggest 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 issued from the primary market (auction) can resell without holding to maturity. This means the tenor of treasury bills you get to buy is based on the remaining tenor on the bill. For example, if someone bought a 182-day tenor treasury bills at 15 per cent and holds for 12 days before deciding to sell, you will be buying a 170-day tenor bill (since 12 days has elapsed) at an agreed rate, usually below 15 per cent.

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

So, in effect, you are getting at a lower rate (rather than nothing at all), but there are also some advantages. You can simply go to a 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 is available on the spot. Also, you may not be charged custodian fees, hence you pay lower transaction fees. Each broker will have their minimum subscription amount, so you need to find out which broker suits your portfolio size.

Money market mutual funds

You can also invest in treasury bills indirectly by investing in treasury bills linked to money market mutual funds. The broker buys treasury bills and bonds using pooled investors funds and allocates interest periodically (monthly etc.) and also charges management fees. The rate you get here will be lower than the primary and secondary market (due to management fees etc.), but you will get higher returns compared to other money market instruments.

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 is monthly, you are forced to develop a savings habit which also helps you build up your pool of funds which you can use to invest in the secondary market later on as you desire. Again, each broker has a minimum subscription amount, so you need to do your own investigation to find out which broker works best for you.

Primary market through pooled funds

Some brokers may have an arrangement whereby some investors can pool funds together to make up the N50m minimum requirement and invest directly through the primary market. The modalities may differ. Since it is pooled funds, the broker may have to go with the house bid rate when making a bid. That means you have no say over the submitted bid rate since your money is 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 the bid rate since you know yourselves and can come together to decide which rate to bid.

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

Keep learning

Financial education, as any other field, is a never ending journey. School is never out for the person who wants to succeed in all seasons. Things change along the line, as we have just witnessed and you need to be informed and have enough education to adjust and change with the changing times.

For questions, comments or enquiries you can contact him at, Follow me on twitter @usiere, BBM C002B2697