{"id":9664,"date":"2023-02-20T22:16:03","date_gmt":"2023-02-20T20:16:03","guid":{"rendered":"https:\/\/learn.thndr.app\/?p=9664"},"modified":"2024-07-18T10:42:10","modified_gmt":"2024-07-18T08:42:10","slug":"treasuries-is-lending-the-government-the-safe-investment-youve-been-looking-for","status":"publish","type":"post","link":"https:\/\/thndr.horizondm.com\/learn\/treasuries-is-lending-the-government-the-safe-investment-youve-been-looking-for\/","title":{"rendered":"Treasuries\u2014 Is lending the government the safe investment you\u2019ve been looking for?"},"content":{"rendered":"\t\t
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What are Treasuries?<\/span><\/h3>

Think of treasuries as IOUs [I owe you], or promise-to-pay notes from the government. The government borrows money from people, just like you might borrow money from a friend – and in return, they promise to pay you back with interest on a specific date (aka the maturity date of the treasury). You can think of this like the \u2018expiry date\u2019 on the loan.\u00a0<\/span><\/p>

Why do governments borrow?<\/span><\/h3>

People usually take loans so they can buy a car or a house. The government borrows money to fund things like short term deficits, roads, public schools, and defense.\u00a0<\/span><\/p>

What are the different kinds of treasuries?\u00a0<\/span><\/h4>

T-bills<\/b> are <\/span>short-term loans<\/span> to the government that have to be paid back plus interest. This is paid back in a year or less (either 3, 6, 9, or 12 months), and they\u2019re usually used to finance deficits.<\/span><\/p>

T-bonds<\/b> are <\/span>long-term loans<\/span> to the government that have to be paid back in over 1 year\u2014they usually use them to finance big projects. In addition to getting your money back, you also get a fixed payment every 6 months or 1 year.\u00a0\u00a0<\/span><\/p>

Why invest in treasuries?\u00a0<\/span><\/h3>

They\u2019re *almost* low risk<\/span><\/h4>

Since they\u2019re basically loans to the government, treasuries are considered very low risk. The government is considered a reliable borrower with a stable economy, and the ability to tax its citizens in order to generate revenues. In other words\u2014its extremely unlikely that a government won\u2019t be able to pay its lenders back<\/span><\/p>

They allow for short-term investing<\/span><\/h4>

T-bills are considered very short term investment options, as well as second-hand treasuries (which we\u2019ll get into later). This is very useful if you know you will need your money soon, yet you\u2019d also like to earn some interest on it in the meantime<\/span>.<\/span><\/p>

They can give regular payments<\/span><\/h4>

T-bonds work by offering you regular payments. This is a great option if you\u2019re looking to invest your money in something that will also give you a regular income stream. <\/span>This does not apply to T-bills.<\/span><\/i><\/p>

How does the government offer them?<\/span><\/h3>

In Egypt, the Ministry of Finance issues treasuries through the Central Bank (CBE). The CBE holds auctions for T-bills and T-bonds every week. This auction is done <\/span>online<\/span><\/a>, and here’s how it works:<\/span><\/p>

Step 1: Announcement<\/span><\/h4>

The CBE announces the details of the upcoming auction, including the date, amount of money they want to collect, and deadlines. Eg: they want to collect EGP 10 billion, by 25\/02\/23, and will pay it back on 25\/02\/24.<\/span><\/p>

Step 2: Bidding<\/span><\/h4>

Banks place their bids stating how much they want to lend the government and what interest rate they want in return. Eg: a bank can offer EGP 1 billion, and ask for 23% yield (aka the return on that loan).<\/span><\/p>

Step 3: Issuance<\/span><\/h4>

When bidding is complete, the CBE reviews all the bids, by looking at the rates that each bank has submitted. Using this information, they will determine<\/span> the range<\/b> of bids they want to accept. This means that some of the bidders will get higher yields (% returns) than others, and there will be an average yield. This will then be announced on the<\/span> CBE website.<\/span><\/a><\/p>

How can I buy them, as an individual?<\/span><\/h3>

Think about this the same way you\u2019d think about buying a car. There are 2 ways to do this, you can:<\/span><\/p>

  1. a) Buy a brand new car from a car dealership (aka primary market)<\/span><\/li>
  2. b) Buy a used car, from someone who had already bought it from a car dealership in the past (secondary market).\u00a0<\/span><\/li><\/ol>

    Treasuries work the same way. Let’s explore that in more detail:<\/span><\/p>

    Buying treasuries first-hand: Primary market<\/span><\/h4>

    To buy a treasury first hand, think back to the auction we just mentioned. You can participate in the bidding process through your bank. This means you go in not knowing the % return you will get or if your bid will be chosen. Since the auction is what determines the yield (the % return you\u2019ll get).<\/span><\/p>

    You have 2 options here:\u00a0<\/span><\/p>

    1. Place your bid<\/b>\u2014for example, your bid is that you would like to invest EGP 25,000 in a t-bond for a yield of 23%. If your bid falls within the range that the government accepts, your offer will be taken. However, you run the risk of the government not taking your offer, if it is out of their desired range.\u00a0<\/span><\/li>
    2. Ask to take the average<\/b>\u2014for example, you would like to invest EGP 25,000 in a t-bond, at the average yield that is determined by the auction process. You run the risk of not getting the yield you want but you guarantee that your bid gets accepted. This is because your bid is placed at the average of the government\u2019s chosen yield range.<\/span><\/li><\/ol>

      Buying or selling second-hand: Secondary market<\/span><\/h4>

      After buying a T-bill or T-bond, you can decide to sell it before maturity, on the secondary market (just like a used car). This is done through banks. You can also buy other T-bills and T-bonds this way.\u00a0\u00a0<\/span><\/p>

      Use case: when would I buy secondary?<\/span><\/h5>

      Let\u2019s say you have a family trip coming up in 1.5 months. You have some money saved up for the trip that you\u2019d like to make use of until you have to spend it. You don\u2019t have many short term investment options, but imagine you could tailor an investment to mature at the exact time you want. This is almost just that\u2014you can ask for a T-bill or T-bond on the secondary market, with a maturity date that matches your flight.<\/span><\/p>

      All you need to do is visit your bank, and ask them for a T-bill or T-bond with the maturity date that you would like. They will then give you different options on or around the date you\u2019ve requested, and tell you the price of each one.<\/span><\/p>

      Which should I choose\u2014primary or secondary?<\/span><\/h4>

      If you don\u2019t have a specific maturity date in mind (aka if you dont need the money at a specific date in the near future), it makes more sense to buy a primary treasury. This is because you\u2019re buying it directly from the source, meaning that the fees are lower, and you can get the average yield. However, if you have a specific maturity date in mind (aka you\u2019ll need that money for a trip soon), then it would be better to opt for the secondary market option\u2014since you have more control over the amount of time your money would be tied to that treasury.<\/span><\/p>

      Extra info:<\/span> Auction dates<\/span><\/h4>