Treasury bills are issued by the government and can be purchased by investors at a predetermined interest rate. Here we show you exactly how treasury bills work, how they differ from bonds and how you can buy them.
Treasury bills: Meaning
Treasury bills are fixed-interest securities issued by the government. Investors receive the nominal amount of the treasury bill back at the end of the term, and invest only an amount that is reduced by the interest amount. In this way, the state receives liquid funds that it can in turn use for investments.
Treasury bills are issued by UK Debt Management Office (DMO)
Treasury bills are issued by many countries, including the United Kingdom. Here they are issued by the UK Debt Management Office (DMO) through the Bank of England.
From a financial perspective, treasury bills are financial concepts with a short term, which can range from several days, weeks to a few months. Rarely is the term longer than one year. Since treasury bills are directly backed by the government, they are very low-risk investments for investors.
At the end of the term, investors receive their capital back plus interest. The interest rate is fixed in advance and does not change during the term.
Treasury bills vs bonds
Compared to treasury bills, treasury bonds have a significantly longer maturity. This can be from one year to 30 years. Bonds are also directly backed by the state and thus have a low investment risk.
The interest rate on treasury bonds is higher than on treasury bills due to their longer maturity. Investors usually receive an interest payment from the bond twice a year. When the term ends, they get their capital back plus the remaining interest.
Treasury bills: Pros and cons
Although the interest rate on treasury bills is very low, they are a good addition to the portfolio for some investors, as they quickly trigger an interest payment due to their short maturity and bring stability to a portfolio due to the low risk.
Treasury bills and bonds are particularly interesting for investors when the markets are in a phase of downturn and one would make losses with investments on the stock exchange.
Treasury bills are therefore very suitable for capital protection. Moreover, treasury bills can be purchased relatively cheaply (in the region of £100), so that a large initial investment is not necessary. Cons
In contrast to treasury bonds, treasury bills have a lower interest rate. Since the interest rate is fixed, the purchase of treasury bills can be disadvantageous in times of rising interest rates. If you were to invest at a later date, you would benefit from higher interest rates. In this case, a particularly long term of the treasury bill is highly disadvantageous.
How to buy treasury bills
Treasury bills can be purchased in various ways: usually through a broker or a bank. You can make an offer for the price at which you would like to purchase a treasury bill. If the seller agrees, the investor pays the amount and receives the treasury bill.
The price of a treasury bill depends on the current key interest rate of the currency in which the treasury bill is issued, as well as its term and the amount of the interest rate.
Treasury bills & interest rates
The most interesting thing for investors is the interest on treasury bills, after all, you want to generate a return with it. As a rule, the longer the term, the higher the interest.
In recent years, the interest rate on treasury bills has been well below 1%. In comparison, multi-year treasury bonds bear interest rates of 2% to 4% - depending on the term.
Example for treasury bills
An investor wants to buy a treasury bill worth £10,000. The seller offers it for £9,900. As the treasury bill is backed by the state, the investor receives the nominal value of £10,000 at the end of the term. The difference between the purchase price and the face value is the interest rate. In this example, the interest rate is 1%.