The answer is “Yes”, we can invest directly in them. We briefly looked at investing in the stock market and unit trusts in our previous articles, and thought of exploring the Government securities (G-sec) market.
Even though we can get the exposure of investing in Treasury bills (T-bills) and Treasury bonds (T-bonds) through unit trusts, we will look at the option of directly investing in T-bills and T-bonds and understand how the whole process works through this article. We will look at the basics of investing in Government Securities.
What are Treasury Bills and Bonds?
T-bills and bonds are Government securities and it’s issued by the Central Bank of Sri Lanka (CBSL) on behalf of the Government. These are considered default-free securities; what does that mean? Investing in G-sec is basically a safe haven investment as we are actually lending money to the Government. Given the Central Bank’s ability to print or ‘create’ money, government securities are considered unlikely to ever default. The Central Bank’s role will be to act as the agent for the Government, assisting the borrowing and also provide liquidity to the market. T-bills (Short-term securities with maturity with-in a year) are issued in maturities of 91 days, 182 days and 364 days, while T-bonds (Long-term securities with maturities more than a year) are issued in maturities ranging from 2 to 30 years. Both are issued in scripless form which means it’s in electronic form without a physical certificate.
How do you invest? And is there a minimum investment required?
The process of getting started is very simple, similar to opening an account with a stock broker to invest in shares; however, in this instance you open an account with a primary dealer (they are the people who have direct access to the auctions of the Central Bank). The funds you seek to invest will need to be deposited with them as per their instructions. The primary dealer will open an account for you with Lanka Secure where your transactions in G-secs will be recorded.
Minimum investment of Rs 10,000 would be enough to invest in T-bills. You can buy the securities from the secondary market at competitive rates through your primary dealer. Yet, you can also request the primary dealer to place a bid on behalf of you in the primary market, but it requires a minimum investment of Rs 5 million (here the primary dealer gets the security in the primary auction on behalf of you and later will allocate it to your account).
Let’s clarify what’s a primary and secondary market. Basically, primary market is where new Government securities are issued via primary auctions whereas the secondary market is where the existing securities are traded. The process is same when it comes to T-bonds, however bonds are usually traded in blocks and require a large investment of at least Rs 5 million. A smaller investment might not get the best rate in the market.
How do you earn interest from investing in T-Bills and T-Bonds?
T-bills are sold at a discount to its face value and the interest being paid upfront and calculated based on a 364 day basis. That is, let’s say there is a 364 day bond with a face value of Rs. 100 and you purchase it for Rs 95. At the end of the maturity you will get Rs 100 which includes the capital gain and interest. It’s slightly different with the T-bonds, where there is an interest component which investors will receive on semi-annual or annual basis.
How to withdraw your money?
Just like the stock market, there is a liquid secondary market where the bills and bonds can be sold and withdrawn prior to the maturity. Similar to shares, the bill and bond prices will fluctuate based on the Yield to Maturity (we will look at this in the next segment) in the secondary market. The second option is to wait till your T-bill or T-bond matures and receive the face value of your investment.
Now, since we have a basic understanding of Government securities and how it works, you have another option to diversify your investment portfolio further. Let’s delve into the valuation of bills and bonds in the following segments.