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Treasury bills, bonds and notes: what is the difference and how are they used?

Posted: Sunday, June 7, 2020. 9:44 pm CST.

By Aaron Humes: This week’s announcement from the Government of Belize launching a US$30 million Treasury Note, and Prime Minister and Minister of Finance Dean Barrow’s repeated references to borrowing from the Central Bank has our readers asking to explain how this works.

The Central Bank of Belize is the Government’s fiscal agent, but it doesn’t work like a regular bank where money is physically and saved by people.

Internationally, the Government borrows from partners like Taiwan and Venezuela and organizations like the Inter-American Development Bank, Caribbean Development Bank and others much like a regular bank loan would work – you repay at a certain time, interest is calculated, you have to state a purpose for the loan, and so on.

Domestic borrowing is achieved through Government securities facilitated by the Central Bank in which the public may invest. There are three types: Treasury bills, Treasury notes and Treasury bonds.

When the government launches these Treasury Bills, Notes or Bonds, they are essentially borrowing from citizens, either through the domestic banks or individually from those rich enough to afford these securities.

Per the Central Bank’s definition: “Treasury Bills are Government securities issued in multiples of (BZ)$200 and with a maturity period of not more than one year”.

Treasury Notes, on the other hand, are issued in multiples of $1,000 with maturities ranging from one to 10 years. All other Government securities with a maturity of over 10 years are called Treasury Bonds.

Treasury Bills can be bid on by auction, of which notice is posted on the Central Bank website and in the Government Gazette. You must apply using the official Treasury Bills Application Form available in PDF format. To help you determine the amount of your bid you can use the recent and historic results of Treasury Bill auctions. You can also purchase or sell Treasury bills on the secondary market: for more details contact the Bank.

With Treasury Notes and Bonds, the Bank says it “guarantees a market for individual investors (in the event of immediate access to funds). In addition, notes and bonds in the current environment generally pay a comparative rate of return when considered next to savings and certificates of deposits (ie. fixed deposits) at commercial banks.

Finally, the interest income derived from the investment is tax-free. This market is open to all small investors. However, the market is dominated by institutional investors (such as banks, insurance companies and pension funds).”

As of 2016, Parliament set limits on treasury notes and bills to $1.3 billion, which at the time had been intended to settle the BTL compensation bill among other things. Back then, the $1.3 billion limit had been criticized by the Opposition, whose Leader John Briceño accused Government of asking Parliament for a blank cheque, to “allow them to be able to print money through the Central Bank so they can continue their insatiable appetite to spend money…”

The Amandala reported that earlier in the year, the ceiling for treasury notes and bills was raised almost two-fold, from $450 million to $850 million, and it was later revised upwards in August to 1.05 billion dollars. Then-Minister of Government John Saldivar hit back that the previous administration failed to come to the House for approval of such raising of limits, and that Government would not immediately borrow the money, but would like to have it available.

Which brings us to the two most recent offerings of Treasury Notes. The COVID-19 related notes have maturities in five, ten, and twenty years for a total of $75 million. They were available in denominations of multiples of BZ$1,000, issued on April 3, and settled by April 8 at 1:00 p.m. The five-year coupon rate is 4.5 percent; the ten-year rate is 5.25 percent and the 20-year rate is 5.75 percent.

Interest is paid semi-annually in Belize dollars; principal will be repaid on maturity in face value in either Belize or U.S. dollars, whichever the payment was originally made. Interest earnings are tax exempt.

The US$30 million Treasury note issued on Friday is only payable in U.S. dollars, marking a change from previous iterations where the principal and interest could be paid in Belize or U.S. dollars. As Prime Minister Dean Barrow said on Thursday, “Interest on the Note is to be paid semi-annually and principal redemption will be settled in three equal tranches at the close of Years 3, 4 and 5.

Proceeds of the Note are purposed to augment the stock of official Central Bank reserves while the maturity is tailor-made to span the crisis. Hence the affordable principal payoff dates, positioned well beyond what we believe to be the temporary economic slump caused by the COVID-19 lockdown.

To facilitate the remittance of interest and principal payments, successful purchasers of these Notes, whether individual, institutional or corporate, will of course be eligible for domestic U.S. dollar accounts. The Central Bank and our commercial banks will closely collaborate to ensure a subscription process that is both efficient and diligent.

It is widely acknowledged that U.S. dollar accounts have been held abroad by Belizean businesses and individuals from time immemorial. This tax-free Treasury Note now has been crafted as an exceptional, seamless opportunity to relocate this capital to a safe, fixed-income asset of the highest credit quality available in Belize.”


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