Ethiopian Treasury bill investment risks to consider

Understand who owes the repayment

An Ethiopian Treasury bill is a government debt security. The investor's claim is the obligation under that security, while NBE's auction role is distinct from the government issuer's borrowing obligation.

Credit risk is the risk that a borrower fails to make a promised payment as required. Identifying the government as borrower explains the nature of the claim; it should not be turned into a personal guarantee that every possible investment outcome is protected.

For a bill held to maturity, the stated repayment is central to the plan. For a bill sold earlier, the price available in the sale becomes an additional source of uncertainty.

A cash gain can still buy less

Inflation is an increase in the prices of goods and services. If prices rise faster than the investment's after-cost cash value over the same period, the money can have less purchasing power even though the number of birr has increased.

In a fictional example, ETB 10,000 grows to ETB 10,500, a 5% cash gain. If the relevant price level rises by 7% over that same period, the starting ETB 10,000 basket would cost ETB 10,700. The investment has grown in birr but cannot buy the full original basket.

This is why an annualized auction yield and a headline inflation figure cannot simply be compared without matching their periods and meanings. Actual purchasing-power outcomes depend on the price change over the investment period.

Needing the money early introduces price and liquidity risk

The maturity date gives the scheduled repayment point. If cash is needed before then, the investor may need to sell the security. The proceeds depend on the price a buyer is willing and able to pay, along with the transaction's costs and timing.

For the same future repayment, a higher required return from a new buyer implies a lower purchase price. An early sale can therefore produce a different gain or loss from holding the bill to maturity. Liquidity is the ability to complete that sale in the needed quantity and time.

A displayed historical yield does not establish an executable early-sale price. A cash reserve and maturities aligned with planned payments reduce the need to rely on an uncertain exit.

Later purchases can earn a different rate

When a short bill matures, investing the proceeds again requires a new transaction. The next price or yield can differ from the earlier one. Reinvestment risk is the possibility that those later terms produce less return than the plan assumed.

For example, a plan that repeatedly buys short bills for a year depends on several future purchases. The first observed yield cannot establish what every later purchase will earn. A maturity ladder changes when cash returns, but it does not fix the rates available when returned cash is reinvested.

Costs and instruction errors affect the cash outcome

The cash difference between purchase price and face value is reduced by applicable costs. When an investment is small or the holding period is short, understanding the complete outlay is especially useful because a charge is paid from the same budget.

Operational problems concern carrying out the intended transaction: the wrong security, an incorrect amount, a missed deadline or an unreconciled payment. Establish the account and instruction details, then retain the allocation or execution confirmation and holding record.

The practical review is brief: know the borrower, repayment date, total outlay and cash needed before maturity. Then consider how inflation, an early sale or lower later yields would affect that plan.

• Choose a maturity around payment dates
• Understand inflation and real return