What Are Treasury Bills in Canada? A T-Bill Guide for 2024
Fixed income has finally made a comeback in the investment world. For years, it was inferior to dividend stocks due to low policy rates, resulting in extremely low yields. However, now that policy rates have risen, many Canadian investors are looking to fixed-income investments like bonds and treasury bills as a viable option over stocks.
In this article, we’ll go over one of the safest investments on the planet, Government of Canada Treasury Bills, also known as T-Bills.
What Are T-Bills?
Treasury bills, commonly known as T-bills, are debt securities issued by the Government of Canada. These short-term investments are sold at a discount and mature at par value, meaning investors earn interest by lending money to the government. The government then pays you par value at maturity.
T-bills are a popular choice for investors looking for a low-risk investment vehicle due to them being backed by the Canadian government, which virtually eliminates all risk of default.
Why is it called a treasury bill?
The term treasury bill primarily has to do with the maturity of the investment. A bill is the shortest time to maturity. Their typical maturities range from a few days to a maximum of one year, making them highly liquid and an attractive option for investors seeking to maintain a stable cash position.
A treasury note, on the other hand, is more medium-term in length, with maturities that are between 2 and 10 years.
So, you can probably guess that a treasury bond is an investment that matures beyond 10 years.
Why would you buy a treasury bill?
In Canada’s money market, financial institutions and individual investors both consider T-bills as a cornerstone for managing short-term funds. Would I be buying a treasury bill with the money I planned to invest for the long haul? Probably not.
But I’d find value in these types of investments if I’m looking to store cash over the short term. Unlike something like a GIC, T-Bills are very liquid, especially when you start buying them via an ETF (we’ll talk about that later.)
The auction process for T-Bills is transparent, facilitating the government’s need for short-and medium-term liquidity.
Given their risk profile and ease of access, Treasury Bills serve well within diversified investment portfolios. As mentioned, the secondary market for T-bills allows investors to buy and sell before maturity, thereby providing additional flexibility in managing their investment strategy.
Some quick highlights on treasury bills
- Issuance and Maturity: T-bills are typically issued in terms of 91 days, 182 days, or 364 days.
- Purchase Method: Investors can buy T-Bills directly through auctions, via financial institutions, or through the secondary market.
- Minimum Investment: Often has a low minimum purchase amount, making it accessible for various types of investors.
- Interest Yield: Instead of periodic interest payments, T-Bills are sold at a discount; the yield is determined by the difference between the discounted price paid and the par value received at maturity.
- Liquidity: T-Bills can be easily converted to cash due to their short duration and active secondary market, providing investors with flexibility.
- Safety: They are backed by the Canadian government, implying virtually zero risk of default.
Investors often turn to T-Bills as a means to park excess funds in a secure vehicle with added liquidity.
The Bank of Canada offers current and historical data on T-Bill yields, which can allow investors to utilize the data to see if they should be buying right now.
Investment benefits and risks
Many believe that treasury bills, due to them being backed by the government of Canada, have zero risk. However, this isn’t the case. Yes, they have zero risk when it comes to default risk, meaning you’ll always get your original principal back.
However, there are other risks involved. Let’s speak on the main advantages and disadvantages of T-Bills.
Advantages of investing in T-Bills
Predictable Returns: T-Bills offer fixed interest returns upon maturity, calculated as the difference between the purchase price and the par value. They provide a clear, predetermined income, which can be a stable addition to an investment portfolio.
High Liquidity: Treasury bills are known for their high liquidity, making them an attractive option for those who may need access to their money quickly. Unlike a non-redeemable GIC, which is locked in until maturity and cannot be sold to someone else, these instruments can typically be sold quite easily in the secondary market.
Government Guarantee: As a product issued by the Canadian government, T-Bills carry a high level of certainty regarding the return of capital. They’re one of the safest investments on the planet.
Potential risks of investing in T-Bills
Interest Rate Fluctuation: While T-Bills have fixed returns, they are not immune to interest rate fluctuations. An increase in the interest rate after the purchase of a T-Bill can result in opportunity costs if the money could have earned a higher return elsewhere.
Inflation Risk: T-bills may not always keep up with inflation. The fixed income from a T-Bill could effectively be reduced in real terms if inflation outpaces the interest return, diminishing the purchasing power of the guaranteed return.
If you have a T-Bill that earns 3% a year, but inflation goes up by 4%, in “real” terms, which factors in inflation, you’ve lost money.
Opportunity Cost: Relative to other investment options like stocks or mutual funds, T-Bills typically offer lower returns. They are thus not suitable for those seeking higher growth or capital gains. In my opinion, they’re best utilized for short-term capital, as the stock market has proven to outperform them over the long term.
Market Risk: Despite the high degree of safety, the secondary market for T-Bills can still be affected by fluctuations, with changes in demand potentially impacting the price at which an investor can sell the T-Bill before maturity.
How can you buy T-Bills?
Traditionally, those who wanted to buy T-Bills had to go through two methods: Public auctions or the secondary market.
However, there is a brand new, and in my opinion, a no-brainer way to buy T-Bills, and that is with an exchange-traded fund.
Let’s go over all three methods anyway.
Public auctions
The Bank of Canada conducts regular auctions where Treasury Bills are issued. Interested parties can submit a competitive bid through a broker or a financial advisor.
Bids specify the amount they are willing to buy and the price they are willing to pay. Once the auction ends, the highest bidders will have a successful tender and can settle their purchase through the bank or broker used to place their bid.
Treasury Bills are typically issued in terms starting from 28 days up to one year, and the investment matures on a pre-specified date.
Secondary markets
Investors may also opt to purchase already-issued Treasury Bills on the secondary market. This can be done via most brokerage accounts either online or over the phone.
When buying T-bills in this manner, the price is dictated by the current market conditions rather than the original issue auction. T-bills are typically sold at a discount and mature at par value, with the difference representing the holder’s return.
Buyers should consult with their financial advisor or bank to understand the specifics of settling these transactions.
Through an exchange-traded fund
The Horizons 0-3 Month T-Bill ETF, which trades under the ticker CBIL on the TSX, is arguably the easiest and most liquid way for investors to buy Treasury Bills here in Canada.
The fund has exploded in popularity in its short existence due to the rising yield of T-Bills.
It trades much like a stock, and investors can get relatively the same yield as a short-term treasury. You’ll pay just a 0.10% management fee every year to own this fund. This means for every $1000 you have invested, you’ll pay just $1 every year.
Rates and returns of T-Bills
Treasury bills in Canada offer a type of investment that is influenced by various factors, including monetary policy and market conditions. The Bank of Canada plays a crucial role in setting the climate for interest rates, which in turn affects T-bill yields.
The difference in how T-Bills earn returns
This is a confusing element for many investors when they first start to look into T-Bills.
Unlike a bond, which you simply buy at par value and earn a set coupon rate over the duration of the term, you actually buy treasury bills at a discount to par value.
So, you may see a $10,000 T-Bill being issued at $9600. What this means is you will pay the government of Canada $9600 now, and they’ll pay you $10,000 on maturity.
Calculating yield
The yield on Canadian T-bills is determined by the difference between the purchase price and the par value, annualized for the term of the bill. Investors do not receive periodic interest payments but rather earn interest by purchasing the bills at a discount from their par value, which is redeemed at maturity at the full par value.
Therefore, the formula for calculating the yield involves using the purchase price, the par value, and the time to maturity. The annual yield is expressed as a percentage, and it serves as a reflection of the return on investment.
The formula for annualized yield is given by:
Yield (%) = [(Face Value – Purchase Price) / Purchase Price] x (365 / Days to Maturity)
Influence of market conditions
Market conditions have a profound impact on T-bill interest rates. In a typical economic environment, if the central bank adjusts the prime rate, it signals a shift in monetary policy that can make T-bills more or less attractive to investors.
For example, when the Bank of Canada raises the prime rate, yields on new T-bills generally increase as well. Conversely, if the central bank lowers the prime rate in an attempt to stimulate the economy, newly issued T-bill yields tend to decrease.
Market demand also influences the interest rates of T-bills. High demand can drive the prices up, effectively lowering the yield, while low demand can have the opposite effect.
Additionally, broader economic indicators and international events can also lead to fluctuations in T-bill interest rates as investors look for safe investments during times of uncertainty.
Comparison of T-Bills with other investments
Bonds and GICs
Bonds, including government and corporate bonds, offer a fixed rate of return and are seen as relatively secure investments. They typically have longer terms than T-bills and may offer higher yields, reflecting their longer duration and increased risk.
Comparatively, Guaranteed Investment Certificates (GICs) are investment products offered by financial institutions that guarantee the principal and a fixed interest rate.
Just like T-bills, GICs are low-risk and are suitable for investors looking to preserve capital, but they usually differ in their term lengths and have a much wider variety of options.
For example, a cashable GIC could give you added liquidity at the expense of higher interest payments, whereas a market-linked GIC can get you exposure to the stock market while preserving your capital.
The best GIC rates will be with non-redeemable GICs. However, everyone’s situation is different.
Stocks, mutual funds, and exchange-traded funds
In contrast to T-bills, stocks represent equity ownership in a company and come with a higher level of risk and potential for higher returns.
The performance of Canadian stocks is generally more volatile and can provide substantial gains or losses compared to T-Bills.
Mutual funds are pooled investments managed by professionals that can include a mix of stocks, bonds, and other securities. They offer diversification and professional management but come with management fees and are subject to market risks.
Exchange-traded funds, on the other hand, give investors single-click exposure to an entire market index, niche sector, or any other investment strategy you can think of. Unlike mutual funds, they are as liquid as a stock, and investors are able to buy and sell them as long as the stock market is open.
Investors should note that the rate of return on T-bills is typically lower, reflecting their lower risk profile compared to stocks and mutual funds.