Treasury bills are short-term public debt ( fixed income ) securities issued at a discount. They are issued by the State Treasury as a mode of financing. Its maturity is usually between three and eighteen months. The buyer of the bills obtains the gain of fixed interest during the duration of the same until its maturity.
Within the public debt, Treasury bills are the securities with a shorter maturity. Less than 18 months. The most common is that the letters have terms of 3, 6, 12 and 18 months. Due to their temporary nature, they are traded on the so-called money market. On the contrary, government bonds (similar products although they are more long-lived) have a maturity term of around three to five years. Alternatively, the obligations are usually considered to go beyond the decade.
Purpose of Treasury bills
The objective of treasury bills is to obtain short-term financing and at the lowest possible cost. Due to the great liquidity that the bills have and the low risk associated with them, the interest that the State must pay for using this means of financing is not high. It should be said that this is in this way in normal situations, in which the different states have credibility among investors. Credibility is usually reflected in the credit rating.
The country or government that issues public debt with Treasury bills seeks to obtain funds from the markets, committing to their return together with previously established interests. Due to the nature of these financial assets, it is common that the interest to be charged annually is normally fixed. In the same way, its amount and the collection date will be previously specified at the beginning.
Characteristics of Treasury bills
This type of public financial assets have a substantially lower level of risk than others from the private sphere. Reason why Treasury bills have lower profitability levels. They are considered one of the financial assets with the lowest risk that exist in the market. This tool is the main instrument a country has to obtain financing in the short term. They do not usually offer annual coupons due to their short term. That, as we have commented, is less than 18 months. The most common is that the letters have terms of 3, 6, 12 and 18 months. In summary, the characteristics of Treasury bills are:
- They tend to have lower risk
- Its expiration is short term
- They usually have a lower profitability
- They don’t usually offer coupons
Treasury bills are issued at a discount. That is, the face value of each letter is € 1,000. The titles are acquired below the nominal. At the end of the operation, the difference between the acquisition price and the value of the bill (€ 1,000) is the interest on the operation.
Example of issuing a Treasury bill
For example, if the Treasury of a state issues 12-month bills with a return of 1.395%. It means that the acquisition price of each letter was € 986.05 (1.395% of € 1,000). Resulting in a profit of € 13.95 per title.
The procedure for issuing public debt, both in the short and long term, is the auction. The market where the securities are issued is known as the primary market. The secondary market is the one that creates liquidity, where all the securities are traded, the investor being able to invest in terms other than those established (in the case of letters 3,6,12 or 18 months), sell the letters before their maturity or other operations.