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:
- They are short-term issuances. The investment term ranges from three to 12 months divided into issuances of three months.
- The minimum investment is 1,000 euros and any higher amount must be a multiple of that figure.
- 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.
- In the primary market.In other words, going to the Bank of Spain debt issuances.
- 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.
- 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.
