Tuesday, February 23, 2016

How Treasury Bills are sold or bought


Most people ask me a lot of questions about Treasury Bills and Notes and how they come about. Others wonder what the table above represent when they see it in the newspapers on Tuesdays so I have decided to do a little education on the whole process of Treasury bills  and how  the rates come about. 
First of all you should know that, the only two use of Treasury bill to the investor are for protection against  what I call, "the notorious wealth killer" - Inflation and compensation for postponing consumption. My finance lecturer will tell you, those are the only uses, don't bother to look for any. Now you should know that in Ghana, the government through the Bank of Ghana (BOG) deals with the primary dealers (Banks mostly) when it wants to borrow from the public. The primary dealers interact with the  lending public on behalf of the BOG. They mobilize funds from me and you who wants to buy treasury bills and on Fridays, go to the sell it.
The 'BIDS TENDERED' column represent the amount of money mobilized by the primary dealers or the banks. We are lending to the government through them and it is up to the government to reject the Bids tendered or Accept them at the rates we propose. As you can see above, the Ghana government for last week's bids, has accepted all and those are recorded in the next column - 'BIDS ACCEPTED'. 
The 'Range of Bid' column represent the rates at which the various banks or primary dealers are lending to the government. It's from the lowest rate to the highest rate. BOG normally accepts the offers from the the lowest rates to the highest rates. In the case where the Ghana government will not accept all the monies offered, primary dealers who quoted high interest rates would be rejected. It's unfortunate that the Ghana government needs so much money that, they can't afford than to accept all the rates offered by the primary dealers.
Looking at the budget deficit requirements, I can actually forecast the borrowing requirements of the Government of Ghana hence in the next bidding process, the primary dealers who tendered low will be bidding higher and this will eventually lead to an increase in the interest rates. 
And in the case where the government refuses to accept all the rates and only stop at 21.00%, all the higher bidders will be rejected hence the the primary dealers will be forced to reduce the rate in the next bidding which will make interest rates fall.

Moving forward, the 'Bid Allocation' column focuses on the BOG calculating the allocation for each dealer with respect to the amounts they have to give to the government and the rates they bid with. When this is done, the weighted average is calculated and then the Interest Rate / Treasury bill rates are arrived at for the following week. These rates are announced on Mondays, mostly on Bank of Ghana website and in the newspapers on Tuesdays to guide the market for the week after which the process begins again on Friday.
Now you know how the Treasury Bill rates are arrived at and how they are bought or sold.  Let me know if you have any other concerns. 
Keep Investing.

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