UK Treasury bills

In the UK Treasury bills were first issued by the Bank of England in the early 1700s, when the UK adopted the concept of money as an amount written on a piece of paper, rather than a piece of metal with intrinsic value.

Table 9.1 shows the results from the four sales of Treasury bills which took place weekly during March 2014, on the 7th, 14th, 21st and 28th. Note that the issues occurred every few days as the government borrowed more money or simply replaced maturing debt. Table 9.2 shows the Financial Times tender results table for the three-month T-bills on 14 and 21 March 2014.

Tenders are held by the DMO on the last business day of each week (i.e. usually on Fridays), for settlement (paid for) on the following business day, usually Monday. The redemption date is the day when the face value of the bill (£100) will be paid to the holder.

Table 9.1 DMO Treasury bill tender results, 1 March 2014 to 31 March 2014

Source: www.dmo.gov.uk

Table 9.2 UK three-month Treasury bill tender results in the Financial Times

Information shown relates to the three month tender.

Source: DMO including details of the month tender, see www.dmo.gov.uk

The bid to cover ratio is the ratio of the amount that was actually bid to the amount of T-bills offered; if the number is greater than 1 it shows that there were more bids than the amount on offer. Although extremely rare it is not unknown for an offer to be undersubscribed^[23] - it is a sign of lack of confidence in the government's financial situation and/or indigestion in a market faced with an exceptionally high volume of government borrowing.

Treasury bills in March 2014 yielded a rate as low as 0.364505% for one month T-bills, 0.363186% for 3M T-bills and 0.394030% for 6M T-bills (Table 9.1). The average price is the average of the price handed over by bidders for bills which will pay the holders of the bills £100 in one month, three months or six months.

Those participants that wish to purchase compete in the weekly tender by placing bids based on the yield they will accept. The bids are gathered and different yield prices accepted. The DMO determines what is the highest accepted yield (and therefore the lowest purchase price) needed to sell the requisite amount of bills and allocates bills to purchasers bidding below this yield.

An important consideration to take note of when undertaking any calculations associated with T-bills around the world (and other money market securities) is the day count convention. For ease of calculation, some countries/markets use a 30-day month and 360-day year, rather than the actual variable days in a month and a 365-day year, or 366 in a leap year. This can get complicated when the repayment date falls on the 31st of a month, and there are various methods for dealing with this. Other markets use the actual number of days until redemption of the instrument and the actual number of days in a year. Great care must always be taken to check which day count convention is being used and to understand terminology, e.g. actual/360, 360/360, actual/actual, actual/365 and so on - it is imperative that an investor knows which conven­tion is being used and how it works. The UK still uses the 365-day year for Treasury securities.

The DMO published results for the tender on the 21 March for the 23June bill are shown in Table 9.3. From this it can be noted that the bill was over­tendered by a factor of 1.95, i.e. the amount on offer was £2 billion (at face value), there were actual bids offered totalling nearly £4 billion and about 88% of the bidders achieved the highest yield of 0.418%.

During the life of the bill, its value fluctuates daily as it is traded between inves­tors - see Table 9.4, which gives the daily March and April 2014 figures for this particular bill. The yield shown is the (annual) return that a purchaser in the secondary market will achieve between purchase date and maturity date. Note:

Table 9.3 Results of tender on three-month T-bill ISIN code: GB00B7P4VP73

Source: www.dmo.gov.uk

Table 9.4 Daily trading prices for Treasury bill GB00B7P4VP73, 21 March to 16 April 2014

Source: www.dmo.gov.uk

the price gravitates towards par value as the day of maturity draws nearer because on redemption day, 23 June 2014, the holder will receive the face value of £100.