Treasury Bills

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=anX_AW2lZBHE

Summary

Latvia, a member of European Union in northern Europe, finally sold 8 million Lati (15.3 million) worth of two-year treasury bills on February 24, 2010 for the first time since May 2007. The bills delivered “an average yield of 6.07%” which almost doubled the rate that U.S offered. In addition to the sale of two-year bills, Latvia also sold 16 million treasury bills with different maturity periods. The success of this auction was primarily because of Latvia’s acquisition of 7.5 billion Euros (10.2 billion) funding from a union formed by European Commission and IMF. The Latvia financial markets showed sign of stabilizing and investors are regaining their confident on Latvia’s grasp on recovery. The interest rate for Latvia one-year Treasury bill dropped from 14.75% to 5.6% on February 18th.

Connection

Treasury bill is promissory note which bears no interest but can be sold on a discount basis. For example, it is possible for buyers to purchase treasury bills of $100000 with only $950000. However, government or central bank itself will place a reserve bid to avoid underbidding for these bills. Upon the maturity date, which can be varied from months to years, the bearer of T-bills will receive their investment based on the face value on T-bills. It is one of the most secure investments for investors because these bills are issued by the government, although it is not a guaranteed return due to the possible financial dysfunction of the issuing government. In the case above, because public was not convinced that Latvia would be able to handle the financial crisis, no successful sales of treasury bills had been made since 2007. Later, Latvia was forced to raise the one-year bill average yield to 14.75% attract investor but which, in another way, meant there is a high risk accompanied. Nonetheless, sales were still not made and Latvia had to acquire loan from European commission to sustain their economy. A treasury-bill is a way for government to acquire loan from the public.

Reflection

In my opinion, acquisition of treasury bills is an alternative investing opportunity for the public because it generally has a higher yield than GIC or term deposit and relatively safer than investing in stock markets and mutual funds. Every investor can purchase T-bills through banks at a smaller amount and receive the same yield central government offered to banks. In spite of the relatively safer return, I personally prefer buying stocks because of its greater return. In lots of cases, if investors do their homework and be patient enough, it is never too hard to find a company that can double or even triple in a year or so. After learning about T-bills, I found out that T-bills can be used as an indicator for people’s forecast on the countries’ future performance. Countries with high T-bills rates might signal that they are in desperate need of cash and they are running into some financial difficulties.