Seguros y pensiones para todos

Why is everyone talking about Treasury Bills?

Why is everyone talking about Treasury Bills?

Home > Blog > Why is everyone talking about Treasury Bills?

Fixed income is back in fashion with Treasury Bills taking a starring role. The demand for these has been so high that it has forced the Bank of Spain to change the contracting system to avoid queues.

The reason for this Treasury Bill frenzy involves a combination of factors. On the one hand is the rise in interest rates by the European Central Bank (ECB) to combat inflation, which caused the yield on public debt to rise to levels that became attractive to savers.

On the other hand, is the rise in inflation itself. The rise in prices and its effect on savings has made it necessary to look for ways to protect the wealth of savers, something that up to now had not been as important, since it is not the same thing to see savings lose 1% of their value per year as to see their real value decrease by nearly 10%.

Finally, the economic and political uncertainty that was transferred to the stock markets at the beginning of the year caused investors to look for more conservative and theoretically safer investments such as, for example, fixed income or gold, which usually act as a safe haven.

These factors are what have been driving Treasury Bills and other public debt issues. What we are going to look at now is what they consist of, their characteristics and investment alternatives.

What are Treasury Bills

The Public Treasury defines Treasury Bills as “short-term fixed-income securities represented exclusively by book entries”.

In reality, Treasury Bills, like all fixed-income securities, are debt issuance bonds. In this case, it is a debt issued by the Spanish State. By investing in Treasury Bills, what you do is lend money to the Government in exchange for a pre-agreed return.

Characteristics of Treasury Bills

There are three elements that define Treasury Bills:

  1. They are short-term issuances. The investment term ranges from three to 12 months divided into issuances of three months.
  2. The minimum investment is 1,000 euros and any higher amount must be a multiple of that figure.
  3. They are securities issued at a discount. In other words, as an investor you will receive the difference between what you have paid and the agreed return. To help you understand this better, a Treasury Bill that offers a return of 5% over 12 months will cost you 950 euros, and after a year you will receive 1,000 euros. That’s how discount issuances work.

Treasury Bills were created in 1987 and are issued by auction, so it is not always possible to acquire them in each issuance. The amount of debt in each auction is limited.

Another characteristic of Treasury Bills is that they do not include income tax withholdings, although you do have to pay tax on them. Specifically, the profit from this type of fixed income is considered a return on capital that is taxed as savings income.

This means that you will have to pay between 19% and 28% on the returns generated. In addition, by not including withholdings, no money is advanced to the Treasury, so you will have to do this when filing your income tax return. This is a good example of how important it is to know what taxes you will be paying on your investments.

Are they a safe investment?

Investment in Treasury Bills is considered a safe and conservative type of investment. However, that does not mean that it is risk-free.

The main risk involved in this investment is the possibility of non-payment by the Kingdom of Spain. While it is unlikely that the country will default or become bankrupt, it is a possibility that should be taken into account. In fact, that is what you should analyze when investing in fixed income in general, among other things.

Apart from that, if you invest in Treasury Bills and wait for them to mature, you will receive the agreed return with no risk or possibility of loss, except for default.

To this risk is added the opportunity cost, which in this case is defined by the possibility that the interest rate of subsequent issuances will be higher. This risk only applies to those who want to sell the bills they have bought before they expire.

This can be done in the secondary debt market, which is something like the fixed income stock market. For this reason, even though we are talking about fixed income, the value of the bills can vary if you do not wait for them to mature.

In that case, and only in that case, the value of your Treasury Bill in the secondary debt market will depend on the economic outlook and the following debt issuances. To understand this better, imagine that your bill pays a return of 2% over 12 months, but after four months you need the money. At that time, one-year debt issues give a return of 4%.

Do you think someone will pay the same as you paid to get your treasury bill? It is unlikely. Yes, you can sell that bill, but for less than you paid since its value is less when compared with new issues.

This is the second danger of Treasury Bills, although it only applies if you want to sell them ahead of time.

How can you invest in Treasury Bills?

There are three basic ways to invest in Treasury Bills.

  1. In the primary market.In other words, going to the Bank of Spain debt issuances.
  2. In the secondary market, where past issues are traded. This is where you can sell the bills you have in your portfolio or buy previous issues.
  3. Through monetary funds. These types of funds invest in very short-term debt and usually add public debt issuances from various countries and even companies. This is a more diversified option for investing in short-term public debt.

Monetary funds are one of the alternative ways you can take advantage of the cash in your emergency fund without making it unavailable.

You may also like…

Cognitive biases that condition what you buy and how you invest

Cognitive biases that condition what you buy and how you invest

What are cognitive biases? Cognitive biases are mental shortcuts in our brain when we receive and process information so that we can make a decision and act accordingly. They are like automatic brain responses based on years of evolution designed to help us act...

How to make the most of your cash

How to make the most of your cash

And the fact is that, with high inflation rates, your emergency fund savings lose their value month by month. In other words, this money is worth less over time as the cost of living rises. Is there anything that can be done? To begin with, do not lose sight of the...

What should you do with your savings in a recession?

What should you do with your savings in a recession?

However, the actual fall in the Eurozone was 0.1% in both the last quarter of 2022 and the first quarter of 2023, closer to zero growth than to a sharp economic contraction. In Spain, the GDP has not fallen since the first quarter of 2022, but the fact that the German...

The power of automating your finances and certain habits

The power of automating your finances and certain habits

It's like a vicious circle that prevents you from moving forward. The reason for this is very simple: they are processes that depend on your willpower. Even when you build the right habits, it's easy to have slip-ups that undermine your confidence and make you feel...

Should you sell your investments to pay off your debts?

Should you sell your investments to pay off your debts?

The truth is that there is no one-size-fits-all answer. The most appropriate solution will depend on both the type of debt and your investment profile, which will determine to a certain extent the returns you can achieve with your investments. Safe profit vs....