Dubai: If you, like many others, were looking for better ways to park your cash in order to earn more interest, it’s likely you were bombarded with options like stocks, fixed deposits, mutual funds, or more. But have you heard of government-issued investment products like T-bills or T-bonds?
Treasury bills (T-bill) or bonds (T-bond) are essentially debt instruments issued to potential investors by the any government worldwide. By investing in them you are lending your investment money for the duration of the security, during which you will be paid back a specific, fixed amount of interest.
Let’s say you buy a two-year Treasury bill or bond for which you will earn a fixed amount of interest every six months for two years. At the end of the two years, the asset ‘matures’ and your deposit is returned to you — meaning you’ll be left with your initial investment plus any interest you earned.
So while they essentially work like Fixed Deposits (FDs), what you should know about Treasury bonds and bills is that they all have different maturation rates. While Treasury bonds are long-term bonds that mature after 20 or 30 years, Treasury bills are anything that matures in less than two years.
Are Treasury bills better than Treasury bonds?
“If the money will be needed in the short term, a Treasury bill with its shorter maturity might be best. For investors with a longer time horizon, Treasury bonds with maturities up to ten years might be better,” said Zubair Shakeel, an investment advisor working with a Dubai-based asset manager.
“Generally, bonds are preferred because they provide a predictable income stream as they pay investors interest twice a year. If the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing.”
However, some downsides to keep in mind that not all government-issued bonds periodically pay out interest payments, and Treasury bonds may yield lower returns on average than a higher-growth investment such as stocks.
Regardless, T-bonds still tend to offer more stability and liquidity compared to their counterpart, meaning their returns are more reliable and can help cushion the effects of stocks in your portfolio, and they're also easy to sell and turn into cash.
What other risks and perks should you keep in mind?
Both T-bills and T-bonds have a common risk when investing in them. They trade based on the conditions of the overall economy and what’s going on with interest rates. If rates in general are going up, the rates associated with these instruments go up as well, and vice-verse.
In the current climate, we’ve seen interest rates worldwide climb steadily over the past 18 months. “As a result of the rate hikes recorded over the past year-and-a-half, these Treasury instruments are producing rates of interest that attract investors,” added Shakeel.
“However, in order to understand which specific Treasury product makes the most sense for you — bonds or bills — you need to determine how long you want your money invested and what interest rate these products are offering.”
Moreover, as discussed above, the longer the duration of the security, the more it yields for you in interest. But in the current global rate hike environment, you’ll earn more interest from a shorter-term product (such as a Treasury bill) than a longer-term one (such as a Treasury bond).
Bottom line: Should you invest in T-bills or T-bonds?
If you’re seeking low-risk investments, your first choice should be Treasury securities, given that they are backed by the credit of the government that issues them. This is why such investments, at times known as ‘Treasurys’, are widely considered to be the “safest investment on earth.”
Brody Dunn, an investment manager at another asset advisory firm in the UAE, agreed with Shakeel that your decision to invest in Treasury bonds or bills depends on “how long you plan on staying invested (i.e. time horizon) and how much risk you can take on (i.e. your ‘risk tolerance’).”
“If the money will be needed in the short term, a Treasury bill with its shorter maturity might be best. For investors with a longer time horizon, Treasury bonds with maturities up to ten years might be better. Typically, the longer the maturity, the higher the return on investment.”
Regardless of which type of security you purchase, the risk to you is quite low if you plan to hold the instruments to maturity, i.e. the agreed-upon date on which the investment ends. That’s because governments worldwide rarely default on its debt obligations, and the likelihood it will remains low.
“But if it’s the low risk of Treasury products that attracts you to it, know that it’s also because it’s low risk, these investment avenues don’t pay as much as certain types of global stocks, bonds or funds,” added Dunn.
“So you would financially benefit by balancing out or diversifying your risk by allocating not more than 5-10 per cent of your portfolio to not just T-bonds or bills, but other higher-risk investments like stocks or cryptocurrencies as well.”