How to invest in Spanish government bonds and Treasury bills

Spanish government bonds at 3.4%: how to buy them and what can go wrong

Buying government debt sounds like guaranteed boredom. But with Spanish Treasury bills yielding 3.4% over one year —the entry route into Spanish government bonds for the small investor—, boredom pays better than most savings accounts. The real question is how it's done, how much you earn, and why some investors prefer not to fund the state.

Bills or bonds: not the same thing

For one-year terms you don't buy bonds, you buy Treasury bills. Bonds are for longer terms, from 5 to 30 years, and their price fluctuates more. Bills work at a discount: you pay around 970 euros for every 1,000 of nominal value and receive the full amount at maturity. The benchmark yield for the one-year Spanish bond stood at around 3.366% at the time of writing, a rate that has turned government debt into direct competition for savings accounts.

Safety is not absolute

The risk of government debt is considered almost nil in the short term, but it is not zero. If the state goes under, banks fall with it; if it doesn't, deposits up to 100,000 euros are protected by deposit guarantee funds. The practical difference between bills and deposits is small, although some argue that sovereign debt is slightly safer than a private institution. Greece already proved that bonds can suffer haircuts: in the last crisis it repaid 60% of nominal value, meaning investors lost 40% of their money.

Alternatives with more yield and less state

The return on Treasury bills has pushed many to compare with high-interest savings accounts and money market funds. Institutions like Trade Republic offered 3.75% gross with no minimum holding period, and Bank Norwegian 3.7%, above the bills. Some money market funds were close to 4%. The cost is taking on counterparty risk and paying tax on the interest. There are also those who prefer gold or silver out of distrust of governments' solvency.

The Greek data point is the unsettling one: when a state cannot pay, it doesn't go bankrupt like a company, it restructures and gives you less. Treasury bills at 3.4% are attractive, but it's worth remembering that this yield exists because someone needs your money. And they don't always pay back what was promised.