A complete guide to Treasury bills

Treasury bills are a key part of the short-term money markets. The UK government uses them to manage its daily funding needs, and their yields act as a reference point for other short-term sterling investments.

Most T-bill guides are written for retail investors buying through an ISA. This one is written for corporate treasury teams. It explains how UK Treasury bills work, how they're priced and taxed, and how organisations can access them.

What are Treasury bills?

A Treasury bill is a short-term debt security that a government issues to borrow money for up to a year. It pays no coupon, so there are no regular interest payments. Investors buy it at a discount and receive the full face value at maturity, and the difference is their return.

Treasury bills started in the UK with the Treasury Bill Act 1877, which gave the government a flexible way to meet short-term cash needs. Most developed countries now run similar programmes.

Since the UK government backs T-bills, markets see them as close to risk-free in sterling. This makes them important for bank liquidity and Bank of England operations. Their yields also serve as a reference for pricing other short-term investments, such as bank deposits and commercial paper.

Treasury bills and gilts

Both gilts and Treasury bills are UK government debt, but they differ in maturity. Gilts are long-term bonds that pay a coupon every six months and can last for decades. Treasury bills are short-term, with a maximum maturity of 364 days and no coupon.

This difference matters for treasurers because longer maturities mean bigger price swings when interest rates move. A long gilt can change value a lot, but a three-month bill held to maturity pays its face value no matter what happens in the market. Gilts near their redemption date act like bills, so some investors use them to meet short-term needs.

How do Treasury bills work in the UK?

The UK Debt Management Office, an executive agency of HM Treasury, issues Treasury bills on the government's behalf. It uses these bills to manage cash flow, balancing government spending and tax receipts throughout the year. The DMO has handled this since April 2000, taking over from the Bank of England.

UK Treasury bills are sterling-denominated and pay no coupon. They’re held electronically in CREST, the UK's central securities depository, and can be transferred in penny increments. New bills with the same maturity date are interchangeable, which helps keep the secondary market liquid.

Maturities and the weekly tender

The DMO runs regular tenders on the last business day of each week, usually Friday, with settlement the next business day. These tenders usually offer bills of about one month (28 days), three months (91 days), and six months (182 days). The DMO can also issue 12-month bills, though it has not yet held a 12-month tender.

Alongside the weekly tenders, the DMO can hold ad hoc tenders for any maturity between one and 364 days. It can also issue bills directly to eligible counterparties when its cash management needs require it. These bills are identical to those sold at the weekly tenders.

Can you buy Treasury bills in the UK?

Only certain banks and dealers, called Treasury bill primary participants, can take part directly in DMO tenders. These dealers can bid for themselves or for their clients. Companies must go through one of these firms to buy at tender, with a minimum purchase of £500,000 nominal.

The high minimum and the need for a custody account that can hold CREST securities make direct tender access difficult for smaller organisations. Larger companies usually buy through their bank, a custodian, or a broker, either at tender or in the secondary market. Retail investors often use investment platforms, usually within an ISA or SIPP.

How are Treasury bills priced?

A T-bill's price reflects the yield investors want for lending to the government for that period. Since there is no coupon, all the return comes from the difference between the purchase price and the face value at maturity. Higher yields mean lower prices, and lower yields mean higher prices.

At each weekly tender, bidders state the yields they are willing to accept. The DMO accepts the lowest-yield bids first until it has sold the full amount on offer, then publishes the results soon after. The results show the average accepted yield and the cover ratio, which shows how many times over the tender was bid.

How much does a 3-month Treasury bill pay?

UK Treasury bills use the money market yield method, which applies simple interest based on the actual number of days divided by 365. The price for each £100 is calculated as 100 / (1+ yield x days / 365). The return depends on the yield at purchase and the days to maturity. Convention is to quote T-bills to three decimal places.

If a treasurer buys £5m of a three-month (91-day) bill at a 4.00% yield, the price is £99.013 per £100. The company pays £4,950,650 at settlement and receives the full £5m at maturity, earning £49,350 over 91 days.

This example rate is for illustration only, as actual yields change with each tender. The DMO publishes results on its website, so treasurers should check the latest figures before comparing T-bills with other options.

What drives Treasury bill yields?

The main factor affecting T-bill yields is what the market expects the policy rate to be during the bill's term. In the UK, this is the Bank Rate, which the Bank of England's Monetary Policy Committee sets. A three-month bill yield usually reflects what the market expects the Bank Rate to average over the next three months.

Supply and demand also affect yields. If the DMO issues more bills, yields can rise, while strong demand from banks and money market funds for safe, short-term assets can push them down. Demand for these assets often jumps at quarter-ends or during market stress, sometimes pushing bill yields below Bank Rate.

Are UK Treasury bills tax free?

Tax treatment depends on who holds the bill. For UK companies, T-bills generally fall within the loan relationship rules. The return is taxed as income under corporation tax, broadly in line with the amounts recognised in the accounts, so the discount usually accrues over the bill's life.

Individuals are taxed differently, since T-bills are deeply discounted securities and the gain is taxed as savings income rather than a capital gain. This sets them apart from gilts, where gains on disposal are exempt from capital gains tax, although bills held within an ISA or SIPP are entirely tax-sheltered.

Tax rules can change and depend on each organisation's situation. Finance teams should get specific advice before including T-bills in their cash strategy.

Do Treasury bills count as cash equivalents?

IAS 7 and FRS 102 define a cash equivalent as a short-term, highly liquid investment with very little risk of losing value. Usually, this means an investment with a maturity of three months or less from the purchase date. A three-month T-bill bought at issue usually qualifies, while a six-month bill is generally considered a short-term investment instead.

What are the risks of Treasury bills?

Credit risk for UK Treasury bills is very low, but you should still consider it. The UK is rated AA by S&P, Aa3 by Moody's, and AA- by Fitch. The UK has a strong record of meeting its debt obligations, and its bills can be used as collateral in Bank of England operations. Investment policies should state which governments are acceptable and set limits for each.

Interest rate risk matters only if you sell a bill before it matures. If yields rise after you buy, the bill's market value drops, and selling early locks in a loss. If you hold the bill to maturity, you get the full face value back.

Reinvestment risk is the opposite: when a bill matures, you have to reinvest the cash at whatever yield is available then. Inflation is also important, because if the yield is below inflation, the real value of your cash will be lower at maturity.

Liquidity risk is low for UK bills because they trade actively in the secondary market. Institutions with dealer relationships can usually sell a bill before it matures, but will pay a bid-offer spread.

Are UK Treasury bills a good investment?

Whether T-bills are a good fit depends on your cash needs and portfolio. They work well for cash you won't need soon and can set aside for a fixed period. T-bills offer high credit quality and predictable returns, but buying them directly may not be worth the effort for smaller amounts.

Treasurers often compare T-bills with other short-term cash options. Bank deposits are easy to set up but are unsecured claims on a single bank, with Financial Services Compensation Scheme protection limited to £120,000 per eligible depositor, per authorised firm. Money market funds provide daily access and diversification, but they pool investor cash and may hold assets with longer maturities than the liquidity they offer.

Our guide to money market funds explains that trade-off in more detail. For a wider comparison, see our article on the safest investments for your cash. Many organisations settle on a mix, and our guide to why diversification matters for corporate cash shows how to structure one.

Accessing T-bills through TreasurySpring

For most companies, the main challenge is access. Buying bills directly means setting up dealer relationships, custody arrangements, and internal processes to manage each holding. Many finance teams do not have enough surplus cash to justify this setup.

TreasurySpring gives you exposure to a single UK Treasury bill through a fixed-term, maturity-matched structure, without requiring you to arrange your own dealer or custody relationships. Each investment works like a fixed-rate bond: you choose the term, the rate is fixed, and you receive principal plus interest at maturity. Your exposure is to the UK government rather than a bank, and each investment is designed to match one bill, so your cash isn't pooled with other investors.

You can see how this works on the TreasurySpring platform. The same structure also gives you access to bills from ten other governments, including the US, Canada, Germany, France and New Zealand. Alongside sovereign exposure, the platform offers bank, corporate and secured repo options, so you can diversify issuers within one portal.

Putting Treasury bills to work

Treasury bills offer treasurers a short-term claim on the UK government, with transparent pricing at regular tenders. Understanding the process behind them helps you decide how they fit into your practices. The right mix depends on your organisation's cash forecast, risk appetite, and investment policy.

If you want to see how T-bills could fit into your cash strategy, contact our team. We can explain the government options available and how they compare with your current holdings.

For anyone who can’t tell the difference between their COP and their CCP, we’ve introduced our Treasury & Cash Investment Glossary.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.