Spanish Treasury Bills: how investing in government debt works
A complete guide to Letras del Tesoro (Spanish Treasury bills): how to buy them, real returns, taxes, bank fees and what happens if your bank goes under.
English · Original discussion in Spanish · Published
Treasury Bills: the safe haven that promised security but hid an 18% tax surprise
Got €95,000 in the bank and can't sleep? You're not alone. Letras del Tesoro (Spanish Treasury bills) are sold as the ultimate safety cushion: the State gives you your money back, with no withholding at the time. But, as always, the devil is in the details.
How to buy them and what they pay
Buying a bill is simple: you deposit a multiple of €1,000 at the Banco de España (Spain's central bank) — by certified cheque or bank transfer — before the monthly auction. The price is set on the third Wednesday of each month: if the bill is worth €1,000 at maturity and the auction places it at 960, your return is 4.17% (1,000/960 -1). Note: yields fall when demand is high, as peine when the 12-month auction dropped from 4.42% in July to 4.042% in September, a sign of a "flight to quality" amid antiestéticars about the banks.
The tax trap nobody tells you about
Contrary to popular belief, these bills are not "tax free". There is no withholding at source, but the profit is taxed at 18% in personal income tax, just like any deposit. The confusion stems from the old Treasury Promissory Notes, which did offer fiscal opacity and were a haven for black money. Today, if you receive €1,000 from a bill bought at 961.538 (to get a 4% gross return), the Spanish tax authority will come for its share.
The fee that eats your return
Here comes the good part. If you buy through your bank, they hit you with fees: Santander charged 0.25% for transferring to the Banco de España; OpenBank charged 3% — and then they say online banking is cheap. The most profitable option is to go in person to the Banco de España with a cheque (no fee), or use the online route with an FNMT digital certificate. That said, at maturity the Banco de España charges a 0.15% custody fee. Online banks like ING Direct appear not to charge for transfers to the Banco de España, but it's worth verifying.
What if the custodian bank goes bust?
If you buy through your bank, the bill is registered in your name in the Banco de España's records, so a bank failure shouldn't affect you: the security is yours, not the bank's. It's a different matter if the bank acts as an intermediary in the secondary market; there the risk is the same as with any other security. Buying directly in the primary market offers maximum safety: the guarantee of the State.
A safe haven with a banking toll
In the end, the decision comes down to whether you'd rather deal with the Banco de España's paperwork to save on fees, or delegate to your bank and pay the price of peace of mind. With yields already around 4% in 2006, every fee made a difference. Today, with higher rates, the mechanism is the same: the State promises to give you your money back, but the banks will try to keep a cut along the way. Ironically, the greatest safety is also the one that leaves intermediaries the least margin.
Related discussions in the forum
Got €95,000 in the bank and can't sleep? You're not alone. Letras del Tesoro (Spanish Treasury bills) are sold as the ultimate safety cushion: the State gives you your money back, with no withholding at the time. But, as always, the devil is in the details.
How to buy them and what they pay
Buying a bill is simple: you deposit a multiple of €1,000 at the Banco de España (Spain's central bank) — by certified cheque or bank transfer — before the monthly auction. The price is set on the third Wednesday of each month: if the bill is worth €1,000 at maturity and the auction places it at 960, your return is 4.17% (1,000/960 -1). Note: yields fall when demand is high, as peine when the 12-month auction dropped from 4.42% in July to 4.042% in September, a sign of a "flight to quality" amid antiestéticars about the banks.
The tax trap nobody tells you about
Contrary to popular belief, these bills are not "tax free". There is no withholding at source, but the profit is taxed at 18% in personal income tax, just like any deposit. The confusion stems from the old Treasury Promissory Notes, which did offer fiscal opacity and were a haven for black money. Today, if you receive €1,000 from a bill bought at 961.538 (to get a 4% gross return), the Spanish tax authority will come for its share.
The fee that eats your return
Here comes the good part. If you buy through your bank, they hit you with fees: Santander charged 0.25% for transferring to the Banco de España; OpenBank charged 3% — and then they say online banking is cheap. The most profitable option is to go in person to the Banco de España with a cheque (no fee), or use the online route with an FNMT digital certificate. That said, at maturity the Banco de España charges a 0.15% custody fee. Online banks like ING Direct appear not to charge for transfers to the Banco de España, but it's worth verifying.
What if the custodian bank goes bust?
If you buy through your bank, the bill is registered in your name in the Banco de España's records, so a bank failure shouldn't affect you: the security is yours, not the bank's. It's a different matter if the bank acts as an intermediary in the secondary market; there the risk is the same as with any other security. Buying directly in the primary market offers maximum safety: the guarantee of the State.
A safe haven with a banking toll
In the end, the decision comes down to whether you'd rather deal with the Banco de España's paperwork to save on fees, or delegate to your bank and pay the price of peace of mind. With yields already around 4% in 2006, every fee made a difference. Today, with higher rates, the mechanism is the same: the State promises to give you your money back, but the banks will try to keep a cut along the way. Ironically, the greatest safety is also the one that leaves intermediaries the least margin.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (37 replies).
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