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Treasury Bills Definition & Examples

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Last editedFeb 20222 min read

When the government needs to raise some money, one of the most effective tools it has at its disposal is to issue debt instruments for investors to purchase. This includes treasury bills as well as government bonds. So, what are treasury bills and how do they differ from government bonds? While the two instruments are closely related, treasury bills are highly liquid and designed for the short-term.

What are treasury bills?

Many different countries issue treasury bills. Yet whether you’re looking at UK, French, or US treasury bills the concept is the same. A treasury bill is a short-term financial instrument issued by the government. Because they’re backed by a country’s own treasury, they’re considered a low-risk investment and the investor runs very little chance of losing money. The UK Debt Management Office (DMO) issues UK treasury bills via the Bank of England, holding the same sovereign credit rating as the United Kingdom itself.

Maturity periods for treasury bills may last a matter of days, weeks, or months, but very rarely more than one year. When the investor purchases a treasury bill, the money serves as a loan to the government. The government puts this money to use and then repays the investor when the maturity period ends.

US vs UK treasury bills

Treasury bills go by many different names depending on the country where they’re purchased. For example, US treasury bills are often shortened to T-bills while in Germany government bonds are called bunds. Treasury bills UK fall under the category of gilts, which also includes other types of government-backed bonds. The primary difference between treasury bills and bonds, however, is that bonds are issued for longer time periods and are less liquid as a result.

How do treasury bills work?

Within the UK, treasury bills are typically issued on a weekly basis by tender. The timeframe will vary, but three and six-month periods are most common. Treasury bills are sold on a discount basis, meaning that the investor purchases them at a value below par which is agreed upon by tender.

For example, an investor might purchase a three-month bill with a par value of £1000. He pays £950 at the time of purchase, receiving the full £1000 in return when the three-month maturity period has ended. The rate of return depends on the market conditions and other factors.

How to purchase treasury bills UK

If you’re interested in investing in treasury bills, you’ll be able to purchase them through several different outlets.

The first option is to purchase your bill through a non-competitive bid, which means you’ve agreed to accept the agreed-upon rate set by the issuer. In return, you can expect to receive the full bill value when the maturity period expires. You’ll make your payment either to an investment broker or directly to the bank.

With competitive bidding auctions, investors set the discount rate that they’re willing to pay. It’s then up to the seller to accept the preferred rates, dependent on how many bidders there are. You can also trade treasury bills on the secondary market or invest in exchange-traded funds that track their price. 

What determines treasury bill price?

There are numerous factors that can impact the price of treasury bills, including the following:

  • Government monetary policy, including federal interest rates

  • Maturity period, with longer maturities offering higher rates of return

  • Macroeconomic conditions, with more volatile markets carrying higher levels of risk

All these conditions will determine what you can expect to pay for your gilt or treasury bill, as well as its rate of return. What’s important to keep in mind is that the rate of return will be lower than other, riskier investments, including longer term government bonds. However, if you’re interested in a safe investment to diversify your portfolio, treasury bills are a reliable option to explore.

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