UK Treasury Bills, or, more commonly referred to as “T-Bills”, are an often-underrated option for cash investors. Traditionally the yield on a T-Bill would be significantly lower than the yield on an equivalent-duration bank deposit. Consequently, cash holders looking purely to maximise return would shun T-Bills, leaving the only active buyers of T-Bills as pension funds or other institutions (mainly banks) required to hold government debt as part of their asset mix.
Titan Wealth Cash Management was historically an infrequent buyer of T Bills. With our clients wanting to maximise the yield on their cash, T-Bills, with their relatively low yields, were therefore inappropriate. Certificates of Deposit, which have always been our preferred asset class, generally offered better yields.
However, our appetite for T-Bills changed during the Global Financial Crisis (“GFC”) of 2008/2009.
The GFC had its roots in excessive and predatory lending in the sub-prime mortgage market.
The global financial crisis began in 2007 with the collapse of US subprime mortgage securities, spreading rapidly through the global banking system and peaking with the failure of Lehman Brothers in September 2008.
In the UK, the Northern Rock Building Society collapsed (who can forget the images of depositors queuing outside its branches looking to withdraw their savings?), while Halifax Building Society, Royal Bank of Scotland (including NatWest) and Lloyds Bank all required government support.
Clearly, this was an extremely worrying time for a cash management business. Our overriding priority is the safety of our clients’ cash. We therefore needed to act to ensure that clients could have access to their cash on demand and part of the solution was to significantly increase our holdings of UK T-Bills.
So, what are T-Bills and why are they useful?
All UK Treasury bills are sterling denominated, unconditional obligations of the UK government. Treasury bills are zero-coupon eligible debt securities and are issued by the Debt Management Office (“DMO”) through regular weekly tenders in accordance with the Treasury Bill Act 1877, The Treasury Bill Regulations 1968 (as amended), and the Treasury Bill Information Memorandum. The legal framework surrounding T-Bills is important as it underscores one of the main attractions of T-Bills – namely their undoubted security.
This means that T-Bills are extremely liquid. In other words, they can easily be sold for cash. Settlement can be same day but is usually T+1, meaning a holder of T-Bills can redeem them for cash in one working day.
There is a price to pay for the security and liquidity of T-Bills and that price, historically, is that they have a lower yield than the equivalent duration bank deposit or certificate of deposit. Accordingly, when financial markets are operating normally and there are no stresses associated with the safety of the banking system, then we would normally not have a significant allocation to T-Bills.
As alluded to earlier, our appetite for T-Bills changed during the GFC. At that time of crisis, we were prepared to sacrifice yield for undoubted security and liquidity and our clients found this extremely reassuring.
Like all storms, the GFC eventually dissipated and financial markets normalised. However, the government bail-out of the banks had come at a huge cost to the country (and the economy) leading to a review of the measures in place to prevent a recurrence. One significant requirement was for UK banks to increase their capital reserves and, in particular, reduce their reliance on short-term funding.
Short-term funding means banks borrowing cash for terms from overnight to three months. New rules introduced by the Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) made holding short-term deposits more expensive from a capital allocation perspective than holding longer-term deposits of three to 12 months. As a result, UK banks reduced the interest rates they would pay for short-term deposits, thus obliging customers to accept zero or low interest rates on call accounts and forcing customers to place deposits for three months or longer to get a better rate of return.
The FCA and PRA capital adequacy rules did not apply to UK government T-Bills, therefore the yields remained aligned to Bank Rate, making T-Bills an attractive option for depositors. While everyday bank customers don’t have access to T-Bills, Titan Wealth Cash Management, with over 30 years money market experience, is ideally placed to make T-Bills available to our clients.
The GFC has now passed and the banking sector is stronger than it was before, so the desire to hold T-Bills for their undoubted security has waned. However, as T-Bill yields have become more attractive relative to instant access bank accounts, we are regular buyers of T-Bills.
A peculiarity of T-Bills is that they are zero-coupon bonds. The yield is calculated by the discount to face value. So, if as 20th February, for example, you bought £1 million nominal of a UK T-Bill maturing in one month with a yield of 3.75% then the cost of that £1 million T-Bill would be £997,131.54 at the outset. At maturity you would receive £1 million, meaning that the difference of £2,868.46 represents a yield of 3.75% for the month.
So, for those who are not used to investing in T-Bills this feature might be a novelty but if you like the appeal of their undoubted security and the relatively good yields, please do not hesitate to contact our Cash Management team.
