The current profitability of Treasury bills

For many years, Treasury bill yields were constrained by the negative interest rate policies implemented by the European Central Bank (ECB). These policies, designed to stimulate economic growth in a context of low inflation and stagnation, resulted in very low yields for investors.

However, in recent times, the ECB has adopted a policy of monetary normalization, which has implied a gradual increase in interest rates. This new strategy has revitalized the Treasury bill market, which is now a favorite investment for savers.

What are treasury bills?

Treasury bills are short-term fixed-income instruments issued by the Public Treasury, represented solely through book entries. They usually have maturities of 3, 6, 9 and 12 months, which makes them an attractive option for those seeking safe and liquid investments.

To invest in Treasury bills, a minimum amount of 1,000 euros is required for each application. Investments above this amount must be multiples of 1,000 euros.

The bills are issued at a discount or premium to their face value, which is normally €1,000. This means that an investor can acquire them for less or more than that figure.

The return generated by the investment is calculated as the difference between the price paid for the bill and the amount received at maturity. For example, if an investor buys a bill for 950 euros and, at maturity, receives 1,000 euros, the return would be 50 euros.

Treasury bill yields

Economic situation and inflation expectations

Is it a good time to invest in Treasury bills? The Spanish market has experienced significant changes recently, driven by the economic situation and inflationary expectations. Currently, the yield on Treasury bills has been rising, reaching 4.50%. This phenomenon is due to the ECB’s continuous interest rate hikes. The yield on 5-year government bonds has also increased, making them an attractive option for those seeking medium-term stability.

However, inflation in Spain has been rising, raising concerns among investors. As the prices of goods and services rise, the nominal yield on Treasury bills may be eroded if they do not outpace the rate of inflation. This implies that even if yields are attractive in nominal terms, investors’ purchasing power could be affected.

In addition, the current economic situation in Spain, characterized by uncertain growth and tensions in the labor market, influences the perception of risk. In this context of uncertainty, Treasury bills appear as a safer option, although investors should be alert to changes in the ECB’s monetary policy, which could continue to adjust rates in response to inflation.

Effect of bill duration on bill yield in a fluctuating rate environment.

What type of bill should I invest in? Short-term Treasury bills tend to be less sensitive to interest rate fluctuations than long-term bonds. This is because, having closer maturities, their market value is not as impacted by changes in rates.

In the current Spanish context, this factor is particularly decisive. With expectations that the ECB will continue to tighten rates to combat inflation, short-term bills offer greater stability and lower risk. This allows investors to reinvest their funds more quickly and adapt to new market conditions.

In addition, in an uncertain economic environment, where inflation and volatility can vary, short-term bills provide an avenue to protect capital.

Influence of expectations on monetary policy and future Federal Reserve decisions

Expectations about monetary policy are crucial to evaluate the profitability of treasury bills. These expectations refer to the actions taken by the economic authorities to control variables such as the total amount of money in circulation, the exchange rate and interest rates in the financial sector.

A fundamental part of this policy is the interest rate curve, which graphically represents the relationship between interest rates and the maturities of bonds issued by the government.

In the specific case of Treasury bills, investors closely analyze the ECB’s statements and actions to anticipate its future interest rate decisions. If the ECB is expected to continue raising rates to combat inflation, this could lead to an increase in Treasury bill yields.

Thus, expectations about monetary policy not only influence current yields, but are also determinants of market participants’ investment strategy.

Historical comparison in the context of high inflation and high interest rates

In Spain, the dynamics between inflation and interest rates have changed over time, directly affecting the yield on Treasury bills.

For example, in the 1970s, the country experienced high inflation, driven by energy crises and ineffective economic policies. Interest rates reached high levels, leading investors to opt for Treasury bills, even though high inflation eroded their purchasing power and raised concerns about real returns.

In the 1980s, the European Central Bank (ECB) implemented restrictive monetary policies to control inflation, keeping interest rates high. Although Treasury bills offered significant yields, high inflation again limited real returns.

The financial crisis of 2008 marked another key moment, as it led to a drastic reduction in interest rates in Spain. To stimulate the economy, the ECB adopted very low rate policies, resulting in rock-bottom yields for Treasury bills. However, inflation was kept in check, allowing investors to enjoy a positive, albeit limited, real return.

Now, with the recent rise in inflation, the ECB has begun to raise interest rates. Treasury bills now offer more attractive yields, close to 4.50%. However, rising inflation poses the challenge that, even if yields are still higher than in the past, the ECB will not be able to offer the same level of interest rates as it did in the past.

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