Advantages & disadvantages of treasury bills

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Advantages & disadvantages of treasury bills
The Treasury raises short-term funds with treasury bills. (WPA Pool/Getty Images News/Getty Images)

Although the majority of British government debt is issued as bonds, known as “gilts,” the UK Treasury gets some short-term cash by issuing treasury bills. These are short-term government bonds which usually expire in 91 days, which is three months. Occasionally, the Treasury issues treasury bills of 28 days, 63 days and 182 days.

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Payment

One apparent disadvantage of treasury bills is that they do not pay any interest. They are called “zero-coupon.” On the positive side, you can still make money out of the bills because, to compensate buyers for the lack of interest, the government sells the bonds at a discount. That means you pay less to buy them than the government will give you to buy them back on the expiry date.

Price

One complication of treasury bills, which makes them difficult to judge as an investment, is that they do not have a fixed price. Even when they are first issued, the Treasury cannot tell you how much they are worth and does not fix a price. Instead, they declare how many bills they would like to sell and then invite bids for them.

Buying

The process of buying treasury bills is not easy. You cannot go to the Treasury and put in a bid yourself. They will only accept bids from a list of approved institutions, who it calls “primary participants.” Dealing with one of these institutions acting as an intermediary will incur a commission charge. The price you pay for the bills will only pay off if the discount you bid for is more than the commission. You can't buy one or two bills, but have to bid for a minimum of £500,000 worth, although this is calculated on the face value, not the discounted price. An easier way to buy the bills is on the open market, because the bills can be traded after their issue by the Treasury. However, you are likely to get a better price buying direct from the Treasury and you also have to pay a broker a commission if you buy them on the market.

Selling

You do not have to wait for the bills to mature before taking your money back. You can sell them on. However, this process requires the services of a broker again, so the profit you make on the bills would have to be more than the commission you pay to sell, as well as the commission you paid to sell. The selling price depends on the market's opinion on that day and the overall favour that investors have on the security of British government debt. There is a risk that the value of the bills could fall to a lower price than you paid to buy then. However, there is also no upper limit; the bills can even rise in price to higher than their face value.

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