Interactive Investor

Everything you need to know about UK Treasury Bills

Known as zero-coupon bonds, UK T-Bills give investors a secure way of saving for short periods.

23rd April 2024 10:42

by Sam Benstead from interactive investor

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The UK government raises money by issuing bonds: the first type are known as UK Treasury Gilts for longer-term government borrowing and the second are known as UK Treasury Bills (UK T-Bills), for shorter-term government borrowing.

Once the preserve of large investors, interactive investor is breaking down barriers of access to the UK government debt market

ii customers are already being invited to participate in selected gilt auctions known as tenders, and now UK T-Bill access is being opened up too.  

While gilts attract most of the media and investor attention, UK T-Bills are also a valuable savings tool which offer something different to the gilt market.  

They are known as zero-coupon bonds, with all the return for investors coming when the T-Bill matures, rather than via coupon payments.  

They are issued at discount to a £100 par value, and mature over a shorter time period than gilts: one month, three months and six months.  

The investment return comes solely from the difference between the price the government sells to investors at (typically less than £100) and the redemption price the government pays back (£100) on maturity. 

Here is everything you need to know about them.  

How does the government issue UK T-Bills? 

The UK government carries out an auction every Friday for T-Bills, managed by the Debt Management Office (DMO), which is part of the Treasury. The DMO partners with banks, investors and stockbrokers to raise money.  

Are they riskier than gilts? 

No. Like gilts, they are issued by the UK government and so carry the same risk profile as gilts. The UK government has never defaulted on its debt and it is viewed as an extremely safe investment with a very high credit rating by independent analysts. However, it is not risk free.  

How do they deliver a return? 

They are issued at a discount to the £100 par value, which is paid to investors at maturity. Investors participate in auctions to set the price of the gilts, with the yield to maturity calculated as the difference between the auction price and £100. 

For example, if a six-month T-Bill auction was issued at £97.50, the six-month yield figure would be the percentage gain between the issue price and £100, which is 2.56%. On an annualised basis this is a 5.12% yield. 

Can you sell them before they mature? 

No, you can’t. Unlike gilts, there is not an active secondary market for UK T-Bills, so investors must be prepared to hold the instrument until its set maturity date.  

Can they be held in an ISA? 

Yes. UK T-Bills qualify for ISAs as they are a government-issued security.  

How are they taxed? 

They are not classified as gilts for taxation purposes and instead are covered by the taxation rules which apply to “deeply discounted securities”.  

This means that any gains from UK Treasury Bills are taxed as income, rather than capital gains. This differs to gilts, where capital gains are tax-free but coupons are taxed as income. There is no tax if T-Bills are held inside an ISA.  

Do they have ISINs and tickers? 

UK T-Bills have an ISIN number allocated on the morning of the DMO auction, but they do not have a stock market ticker, unlike gilts.  

Why buy them instead of gilts?  

One key advantage is that they offer a fixed rate for shorter periods than gilts, meaning that holding the instrument to maturity may be more feasible than for gilts, which can mature over long periods.  

Investors can therefore lock in a one, three or six-month rate, similar to a fixed-rate savings account, and pick up their return when the bond matures without having to worry about market fluctuations.  

The return profile is simpler to understand than gilts, with all the gain coming on the maturity date and return of £100, whereas a gilt’s yield-to-maturity is a mixture of coupon payments and capital returns or loss when the bond matures. Another advantage is that they can yield more than gilts maturing over a similar period. 

Is the execution/pricing process different in gilts and UK T-Bills?

UK T-Bills are executed through an auction process, whereby market participants place bids to the DMO based on their target size and yield. The DMO will accept bids and allocate T-Bills to bidders at the lowest bid yields until the target issue size is reached. Each bidder receiving an allocation is filled at the yield of their respective bid.

The results of each auction are published on the DMO website under the Treasury Bill Tender Results. These results include details of the highest, lowest and average yields that were accepted. You can find details of previous issues here.

To achieve a successful allocation of UK T-Bills in the auction process, ii will seek to submit bids that are inside the highest and lowest accepted yields, taking account of the prevailing market conditions at the time.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

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