Are you looking for a low-risk investment? Treasury bills may be right for you.
This article is going to talk about why they can be a good investment option. With so many available alternatives where you can invest your money and hope to earn passive income like mutual funds, UITF, PERA, VUL, exchange traded funds like FMETF, time deposit, Pag-ibig MP2, find out what a treasury bill is and how you can get started subscribing.
What are the Philippine treasury bills?
The treasury bills or T-bills are a way for the government to borrow money in the short term. Just like bonds, they are debt instruments that allow the public to lend their money to the state. They’re called with that name because they’re issued by the Bureau of the Treasury.
What’s the difference between a bill, bond (such as retail treasury bond) and note? See below the different securities from the Philippine government.
|Treasury bills||Php||91 – 364 days||None|
|Fixed Rate Treasury Note||Php||2 – 23 years||Semi-annually|
|Retail Treasury Bonds||Php||2 – 24 years||Quarterly|
|Republic of the Philippines Bond||USD||3 – 25 years||Varies|
Why buy treasury bills?
How do you earn from buying treasury bills?
These bills are sold on a discount. Meaning, they are not sold on their face amount. Instead, they’re sold less than its price. A ₱1,000 treasury bill may be sold for ₱990. The investor earns with the spread, which is just another name for the difference between the face amount and the price paid. In this case, you get ₱10 or 1% in exchange return for letting the government borrow your money.
These bills are auctioned, and institutions can bid to acquire them.
What are the maturities?
The government pays the face value of the bill upon maturity. It matures on the specific term that it is sold. Treasury bills have the shortest terms of all government securities, as you can see from the table above. The terms, which indicate how long the bills are repaid, range between a little over a month to less than a year. According to the Bangko Sentral ng Pilipinas table, there are four terms with which they are sold:
These terms are derived from what’s being done around the world where treasury bills are scheduled to mature on a business day.
Why do government issue treasury bills?
The Philippine government issues them to raise funds. These funds are used in many different purposes. They may be allocated to pay for the ballooning national debts or sustain social services such as education, healthcare, agriculture, and anti-poverty efforts. The money that’s collected may also be used towards construction of roads, bridges, and other infrastructure projects or it might be used to fund law enforcement and national defense.
Advantages of treasury bills
What are the benefits when investing in treasury bills? What pros and cons can investors expect? The following are the benefits. Later section wil l talk about the risks.
- Guaranteed returns. Just like savings account, time deposit, and retail treasury bonds, the returns that you get are fixed and guaranteed.
- Low chance of default. They are backed up by the taxpayers. There is little chance that the government may not be able to pay the capital plus the spread back.
- Low risks. Treasury bills are one of the securities that are considered to carry low risks because it’s mostly certain that investments can be redeemed and they can be sold on secondary markets.
- Diversification. Because of the relative low risk, they can be part of a strategy to diversify the risks in an investment portfolio. Buying can be a good way to at least dampen the impact of uncertainty with the returns of equities that you own.
- Interest is paid in advance.
- Convenient. They are open and accessible to the investing public. You can order online or through the brokers, also called government securities eligible securities eligible dealers. In the Philippines, you can actually purchase through the online portal of your bank that has broker license.
- Liquid. If you wish to redeem your money before maturity, you may sell them at prevailing rate through the second market. Also, if you wish to purchase them after their offer period, you can also buy them through the second market.
- Affordable. Some brokers allow you to start buying or selling them for as low as ₱10,000.
Risks in treasury bill investing
What are the downsides associated with buying treasury bills? The disadvantages are:
- Short terms. It can be disadvantageous to place money in securities that mature with short terms because investors would need to look for other investments and prevailing returns are lower than the maturing securities.
- Low yield. The shorter the maturity, the lower the spread. Since bills have the shortest terms among debt instruments, it has the lowest return or yield.
- Transaction cost. If you buy or sell through the secondary market, there might be broker’s commission that needs to be paid.
- Tax. Capital gains are subject to 20% tax.
- Risk of default. While minimal, it’s important to recognize that the default risk is present. (Historically, there are countries that defaulted on their debts.)
- Inflation. Treasury bills can be come unattractive if the yield that you get from them is lower than the rate of inflation.
- Interest rate risk. When interest rate that is declared by the Bangko Sentral ng Pilipinas is higher, existing t-bills fall out of favor. This is an opportunity cost.
- Market risk. Another opportunity cost is when the stock market is on the rise. In times when the economy is expanding and equities are posting increasing values, holders of t-bills are stuck with the now comparatively lower yield.
- No coupon rate. They don’t give fixed income. They only give you the return one time unlike bonds or notes with longer terms where interest is paid frequently.
How can you invest in treasury bills?
There are two ways that you can invest: indirectly through money market funds and directly through brokers.
1. Through money market fund
A money market fund is a pooled investment that buys and sells fixed short-term fixed income such as treasury bills. When you open an account, the fund manager does the trading on your behalf and in return you pay for management fees and other costs.
The downside is that you don’t have control on the assets of the fund. The fund manager is responsible in the daily management. You may open a money market fund through the following companies:
- Mutual fund
- Unit investment trust fund
- Personal Equity and Retirement Account or P.E.R.A
- Variable Universal Life or VUL
2. Through brokers
Anyone can invest in treasury bills. All they have to do is to approach any institutions licensed to sell them (more of this later). However, an important question: Are treasury bills right for you?
They are good investments for any surplus income among people who are risk-averse. That is, they suit investors who would like guaranteed return, short maturity, and very low to no capital loss. They’re also suitable when you’d like to balance the risk in your own investment portfolio.
If you’ve decided that you’d like to subscribe to them, here are the steps.
- Check any government securities dealer.
- Check the minimum amount for investing.
- Prepare the requirements.
- Wait for confirmation.
What is government securities dealer?
The person who is going to assist is a fixed income securities salesman licensed by the Securities and Exchange Commission.
Do your due diligence beforehand by either visiting the website of these companies or reaching out to their representatives if they’re offering treasury bills for investing. The list below is in no way complete.
- Asia United Bank
- Banco De Oro (BDO)
- Bank of Commerce
- China Banking Corporation
- CTBC Bank (Philippines) Corporation
- Development Bank of the Philippines
- East West Banking Corporation
- Land Bank of the Philippines
- Maybank Philippines, Inc.
- Metropolitan Bank & Trust Company
- Philippine Bank of Communications
- Philippine National Bank
- Rizal Commercial Banking Corporation
- Robinsons Bank Corporation
- Security Bank
- United Coconut Planters Bank
What is the minimum amount for investing in treasury bills?
What is the lowest or starting capital? It depends on the company. Some of the institutions do not have this information available on their website. Others like those found in the table below have disclosed the amount.
From the table, Bank of Commerce offers the lowest requiring only ₱10,000. It is followed by Security Bank, which sets the requirement at ₱50,000.
|Bank of Commerce||10,000.00|
|Development Bank of the Philippines||100,000.00|
|East West Bank||100,000.00|
|Maybank Philippines, Inc.||100,000.00|
|Rizal Commercial Banking Corporation||100,000.00|
|Landbank of the Philippines||200,000.00|
|Philippine National Bank||500,000.00|
|United Coconut Planters Bank||500,000.00|
|Asia United Bank||1,000,000.00|
Prepare the requirements.
Just like opening an account for an ATM card, make sure that you have at least two valid government issued identification cards. You’d also be asked to fill out account opening forms, a client suitability assessment, a risk disclosure statement, and other documents. There are different files to be prepared for corporate accounts.
Bear in mind that if you purchase the bills from the secondary market, you’d have to buy them at prevailing rate in the market and pay any charges. You’d also need to re-calculate your gain since you’re more likely be in the middle of the term.
Wait for confirmation.
Your salesman would provide a confirmation of the sale. Government securities are scripless, and so they’re registered in the Bureau of the Treasury’s National Registry of Scripless Securities System (NRoSS).