Treasury Bills vs Bonds- What is the difference between them

Introduction

Market expectations for tighter liquidity and an uptick in the supply of T-Bills have resulted in yields on these instruments rising by 5-15 basis points in the last four weeks.

Recently, the RBI had to increase the funds to be raised through T-bills when it reviewed the government’s cash position and realised it needed more money to fund continued expenditures.

The government will raise about Rs. 7,000 crores by issuing the 91-day government T-bill. It will also raise Rs. 15,000 crores each by issuing the 182-day and 364-day T-Bills.

Further, 10-year government bond yields in India are soaring amid tensions between Russia and Ukraine, and as the Fed has raised interest rates.

It is a common misconception that bonds and treasury bills are one and the same. However, they are very different financial instruments.

Difference between treasury bills and bonds

Before understanding the difference between treasury bills and bonds, let us know what they are.

Treasury bills (T-bills) are short-term money market instruments issued by the government of India to cover its obligations.

A government bond is a long term capital market instrument issued by the government that uses the money raised to finance its budget deficits or government projects.

Both T-bills and government bonds are called government securities.

Let us see the differences between them:

1. Maturity

A key difference between government bonds and T-bills is maturity.

T-bills have a very short term maturity, i.e., less than one year, and are presently issued by RBI in three tenors, 91 days, 182 days, and 364 days.

In contrast, government bonds have a longer maturity, i.e., more than one year.

2. Interest

The other significant difference between the two is the interest component.

T-bills don’t bear interest, like zero-coupon bonds. However, they are issued at a discount to their par value, and upon maturity, they are redeemed at their par value.

Conversely, bonds provide interest to the investors, which could be paid annually, semi-annually, and quarterly. Moreover, they are not issued at a discount to their par value. They can also be traded as g-sec strips.

3. Price Fluctuations

The maturity length of security impacts its price volatility. T-bills, the short term security with a maturity period of one year or less, have historically proven to be more stable than their longer-term counterparts.

Bonds have longer maturity; thus, they carry a higher risk, leading to more significant price fluctuations.

4. Risk and Return

The government backs both T-bills and government bonds. However, the risk associated with T-Bills is low compared to bonds due to a shorter maturity period. Thus, the bond yield on the bonds is higher than T-bills.

5. Issuer

The last difference between T-bills and bonds is the issuer.

T-bills are only issued by the government of India (central government). In comparison, bonds can be issued by central and state governments and municipal corporations.

Conclusion

Government bonds and Treasury bills are two types of low-risk investments backed by the government. Thus, they can stabilise investors' portfolios with steady returns. Both offer safety from inflation, but they have a few differences that an investor needs to weigh before making a decision to invest in bonds india or T-bills.

Investors are advised to choose the investment options that suit their needs, goals and risk profile.

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