Optimism from the incoming Treasury Bills is too much.

The Reserve Bank of Zimbabwe (RBZ) Governor Dr Gideon Gono recently announced that the government will soon launch 90-day and 365-day treasury bills (T-Bills) to raise finance for government expenditure among other things.

Among the questions I have is the reason given by the Governor that the coming of the T-Bills will reduce bank charges. From how I understand these things; there is the interest rate charge and the "other" bank charges which are mostly fixed and might become variable depending on the value of the transactions involved. From my take on Gono's statement, he was talking about the "other" bank charges. These depend on the operating costs of the bank, hence the introduction of the T-Bills will have insignificant impact on these bank charges. So I don't know where is getting this.

The jury is still out there on whether the T-Bills will affect term structure of interest rates by removing distortions in the interest rates of the capital and money markets; and reducing interest rates. According to Gono, this is because the T-Bills will set benchmark interest rates. I myself doubt if they will affect the term structure that much because of the risk borne by the bills. Why risk? Most interest rate structures are broken down into two components, the risk-free part and the risk premium. Definately these T-Bills aren't only risk-free. The more the risk premia on the bills, the less they can be a benchmark for other interest rates. They will be classed among the other short-term paper. This is because the benchmark short-term interest rates around the world, among them the Fed Funds Rate, the Libor and the Euribor are benchmarks because they are considered risk-free.

Now with these T-Bills and their risk premia, no informed trader would want to base their interest rate calculations on these bills. They (traders) would have to look for some other options. Will an active market in the trading of these bills be the thing that affects the term structure of interest rates? I'm asking so because insurance companies and pension funds are required by law to invest a portion of their client's funds in approved securities such as government bills and bonds. I will count the pension funds and life insurance companies out because they try to match the investment term of their assets with the term of their liabilities which is very long (time to death or retirement) unless they are provisioning for the expected liabilities they are likely to pay-out in the next year (which is small compared to the overall liabilities).

Now will the short-term insurers do the trick? Well it's unclear to me but time will tell. The risk factor is the biggest albatross which will affect the Governor's expectations. Interbank lending will be enhanced, depending on the uptake of these bills. Will interbank lending using the T-Bills as colleteral affect term structure of interest rates? Not that much because of the reasons I gave above. Because of the riskiness of these bills, no-one would want to benchmark their interest rates on these bills.

On the other hand, I agree with the Governor that the T-Bills will reactivate the money market and also that they might be possible positive externalities arising from the creation of other financial instruments based on these T-Bills by the government or other private institutions.