Treasury Bill
A treasury bill is a short-term debt instrument issued by a government to finance its borrowing requirements, with a maturity of one year or less. Treasury bills are sold at a discount to their face value and pay no interest, and the return to the holder is the difference between the purchase price and the face value at maturity. They are among the safest financial assets, are highly liquid, and are used by governments to manage their cash flows and by investors as a benchmark for short-term interest rates.
Features
Treasury bills have maturities that are typically three months, six months, or one year, although other maturities are used in some markets. They are issued at a discount and redeemable at face value, so the yield depends on the difference between the issue price and the face value and on the time to maturity. The yields on treasury bills are quoted on various bases, including discount rates and investment yields, and the conventions vary across markets.
Treasury bills are usually issued through auctions, in which investors bid for the securities, and through regular issuance programmes that provide a predictable supply. They may also be sold through standing facilities or through primary dealers, who are obligated to bid in auctions and to make markets in the securities. The issuance programme is managed by the debt management office or the central bank, in coordination with the government's cash management.
Role in government finance
Treasury bills are a principal instrument for managing the government's short-term cash flows. Because tax receipts and expenditures are not synchronised, the government may need to borrow temporarily to cover gaps, and bills provide a flexible instrument for this purpose. They are also used to finance the government's longer-term borrowing requirements, and they are part of the overall debt management strategy.
The issuance of treasury bills is coordinated with monetary policy. In many economies, the central bank conducts open market operations using treasury bills and other government securities to manage liquidity and to implement monetary policy. The relationship between the treasury and the central bank, including the extent to which the central bank provides overdraft facilities, is a central feature of the institutional framework for monetary and fiscal policy.
Role in financial markets
Treasury bills are central to financial markets, providing a safe and liquid asset that serves as a benchmark for short-term interest rates. The yields on bills, particularly those with the shortest maturities, are closely related to the policy rate of the central bank, and they reflect the market's expectations about future policy. The bills are used by investors to hold short-term funds, by financial institutions to manage liquidity, and as collateral in financial transactions.
The short-term interest rates derived from treasury bills are used as reference rates for a wide range of financial contracts, including loans, derivatives, and money market instruments. The liquidity and safety of the market make it a core component of the financial system, and disruptions in the market can have widespread effects, as illustrated by episodes in which stress in the market for short-term government debt threatened the broader financial system.
Characteristics and risks
Treasury bills are considered to have low credit risk, since they are backed by the government, although the creditworthiness of the issuer varies across countries. They have low interest rate risk because of their short maturity, since their prices are insensitive to changes in interest rates. They are highly liquid in normal conditions, and they can be sold quickly at close to their market value.
Risks do exist. For countries with weak fiscal positions or with a history of default, the credit risk is not negligible, and yields on bills may reflect a default premium. Market conditions can affect liquidity, and in periods of stress, even treasury bills may be difficult to sell or may trade at elevated yields. The safety and liquidity of treasury bills therefore depend on the creditworthiness of the issuer and on the functioning of the market, and they are not absolute.
The money market
Treasury bills are a central instrument of the money market, the market for short-term debt. The money market includes interbank lending, commercial paper, certificates of deposit, and repurchase agreements, and treasury bills are among the safest and most liquid instruments in it. The market provides a means for institutions to manage their short-term liquidity and for the central bank to implement monetary policy.
The functioning of the money market is essential to the financial system and to the transmission of monetary policy. Banks and other institutions lend and borrow overnight and at short maturities, and the rates in this market are closely linked to the policy rate. Disruptions in the money market, such as occurred during the financial crisis, can impair the transmission of policy and require central bank intervention.
Auctions and issuance
Treasury bills are typically issued through auctions, in which investors submit bids specifying the quantity and the price. In a competitive auction, bids are accepted in order of price until the announced quantity is allocated, and the price of the lowest accepted bid determines the yield. Some auctions use uniform pricing, in which all successful bidders pay the same price, while others use discriminatory pricing, in which each pays the price bid.
The design of the auction affects the revenue and the behaviour of bidders. Uniform pricing can encourage more aggressive bidding and reduce the winner's curse, while discriminatory pricing may raise more revenue in some circumstances. The choice of design, and the rules on the participation of different types of investors, affect the demand for the securities and the cost of borrowing, and they are a subject of analysis in the design of debt issuance programmes.
International comparisons
Treasury bill markets vary across countries in size, in the range of maturities, and in the conventions for quoting yields. In some countries, the market is large and liquid, with a wide range of maturities and active secondary trading, while in others it is smaller and less developed. The differences reflect the size of the government's borrowing needs, the development of the financial system, and the institutional framework.
The conventions for quoting yields also differ. Some markets quote discount rates, others quote investment yields, and the day count conventions vary. The differences complicate comparisons across markets, and they require care in the analysis of yields and in the construction of reference rates. International organisations work to harmonise the conventions and to improve the comparability of the data, and the resulting statistics support the analysis of money markets and of monetary policy.
The safe asset and its role
Treasury bills serve as a reference safe asset, and the yields on them are used as benchmarks for pricing other short-term instruments. The safety and liquidity of the instruments make them attractive in times of stress, when investors seek to hold assets of high quality, and the demand for them rises, lowering yields. The role of the instruments in the financial system therefore extends beyond the financing of government.
The safe asset role has implications for financial stability. A shortage of safe assets can raise the demand for substitutes and can affect the pricing of other instruments, while an abundance can lower yields and encourage risk-taking. The supply of treasury bills, determined by the government's financing needs and by its debt management strategy, therefore affects financial conditions, and it is a consideration in the analysis of monetary policy and of financial stability.