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In our previous article, we explained how central banks control risk-free rates by determining the terms at which they lend to commercial banks and pay interest on their deposits.
The problem is that only banks have access to the central bank. Fortunately, there is another way for businesses and individuals to access risk-free rates, which we’ll discuss today: investing in Treasury Bills.
What are Treasury Bills?
Treasury Bills are short-term debt securities (usually maturing in less than a year, most often 3 or 6 months) issued by governments to meet their cash flow needs.
In France, it’s the Agence France Trésor, a branch of the Ministry of Finance, that issues these securities on behalf of the government. The acronym “BTF” refers to French Treasury Bills, which should not be confused with “OAT,” a more well-known term for French government debt with longer maturities (ranging from 2 to 50 years).
Generally, each country has its own issuing agency and specific terms for naming its Treasury Bills. In the U.S., for example, they are known as “T-Bills” (short for “Treasury Bills”).
However, despite these terminological nuances, Treasury Bills primarily share common characteristics.
Minimal counterparty risk
Treasury bills issued by the governments of wealthy countries are widely considered to carry no default risk. While it's well understood that zero risk doesn’t exist, it’s far rarer to see a state fail to meet its financial obligations than a bank.
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This economic reality is well understood by large corporations, which tend to allocate their cash surpluses into Treasury Bills rather than leaving them in bank accounts.
Simple and standardized debt securities
Beyond their minimal counterparty risk, Treasury Bills are straightforward financial instruments that are highly standardized. They are issued at a discount to the amount the issuing government commits to repay at maturity. Their yield is essentially the difference between this maturity value and the discount applied at issuance (or the purchase price in the case of a secondary market buy).
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High Liquidity
From issuance to maturity, Treasury Bills are continuously traded on organized and OTC (over-the-counter) markets. After foreign exchange (forex) markets, Treasury bill markets are the most liquid in the entire financial system.
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The ability to buy or sell Treasury Bills in large quantities without impacting their market price makes them particularly attractive assets.
Yields driven by monetary policy choices
Finally, even though Treasury bill markets have their own supply and demand dynamics, their yields are heavily influenced—if not determined—by the risk-free rates set by central banks. This isn’t surprising, given that their risk profile is similar to that of central bank deposits.
The graph below shows that the recent rate hikes initiated by the U.S. Federal Reserve in March 2022 and later followed by the ECB have led to a corresponding rise in Treasury bill yields, which are now above 5% in the U.S. and around 4% in Europe.
In summary, the unique characteristics of Treasury Bills—such as their security, simplicity, and liquidity—make them ideal assets for investing non-speculative capital over periods ranging from just a few days to several months.
In our next article, we’ll explore the easiest and safest ways for businesses and individuals to buy and sell Treasury Bills.
At Spiko, we offer easy access to risk-free rates in both euros and dollars through regulated financial products called "money market funds."Spiko money market funds hold Treasury Bills issued by the most stable governments in the Eurozone and the U.S. federal government. They provide a daily return on your cash with full liquidity, no notice required, no penalties, and no withdrawal fees.
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