Cash Management Bill- (CMBs) Explained in Detail

Cash Management Bill

So, think of cash management bills as very short term securities sold by the government to meet short term emergency funding requirements. They can also be issued during emergency funding situations. Also these securities are not available to retail investors due to its high ticket size.

Cash Management Bill

Detailed Explaination of Cash Management Bill(CMB’s)

So, there can be situations where U.S treasury is in need of money for a few days. This is done by selling very short term bonds called as cash management bills. Generally speaking, the cash management bills tend be of maturity between 7 days to 50 days. But its also possible for the maturities to be higher upto 4 months.

Advantages of CMB’s

There are several advantages, why CMB’s or cash management bills exists. But let me briefly explain the advantages of it;

  • Cash Management bill is flexible because it can be issued for any type of maturities.
  • Has a higher ticket size, so there is less number of securities to sell
  • It can be issued as fast as within one day of notice

Types of Cash Management Bills

Although the type of cash management bills list is not exhaustive but there still exists to major types;

  • Fungible CMB’s: When its maturity co-incides with a maturity of an existing T-Bill
  • Non- Fungible CMB’s: When the primary dealers do not participate in the distribution of such bills.

Features of CMB’s

These type of securities i.e CMB’s tend to pay higher yield than bonds with fixed maturities. But their shorter maturities tend to reduce the overall interest expense to the treasury.

Another feature is that these CMB’s can be purchased with a minimum order of $1 Million. Mostly, you won’t see government issuing CMB’s on a regular basis, however since 2020 it can be seen that CMB’s have been issued on more than several occaisions. For example; during the covid 19 pandeic a 17 week CMB was issued in the range to raise $30 to $40 billion.

Cash Management Bills in India

The government of India, particulary the RBI has decided to issue short term CMB’s with the aim of meeting temporary cash flow needs. This instrument will of maturity with less than 91 days.

The following features have been notified in the RBI website of the Indian CMB’s

  • Firstly the proposed tenure, although can change will be upto 91 days.
  • The bill be issued as discount to face value
  • The bill auction will be announced one day prior
  • The settlement will be done on T+1
  • Lastly, the competitive bidding on treasury bills will not be the same for cash managmentbills.

Procedures Followed for Purchase & Bidding

The CMB’s can either follow competitive or non competitive bidding process.

So, if you bid non competitively, what happens is that you are saying that you are readu to accept the discount rate which will be set after the auction.  This can be done through a broker or a primary dealer.

On the other hand when you competitively bid you specify before hand the discount rate you are ready to accept. Also depending on the discount rate which will be decided the bid will;

  • Be accepted in fill if your bid was less than the auctioned rate
  • Also accepted if your bid was equal to the auctioned rate
  • Not accepted or rejected if your bid was higher than the auctioned rate

In most of the cases the CMBs interest is exempt from income tax.

Frequently Asked Questions(FAQ’s)

Who is generally the buyer of cash management bills?

Generally institutional investors like pension funds, endowment, foundations, mutual funds are the the investors of CMB’s

Are cash management bills frequently issued?

Not intended to be frequently issued but it can be issued based on the goverments needs to meet short term capital needs.

What is the interest rates on cash management bills?

It depends on the auctioned rate, after which it gets decided on the yield.