Bond Watch: how T-Bill auctions have fared in 2024

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.     

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.          

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UK Treasury Bills as a savings strategy 

This year, ii introduced UK Treasury Bills (T-Bills) to customers, allowing them to participate in auctions.  

They are known as zero-coupon bonds, with all the return for investors coming when the T-Bill matures, rather than via coupon payments.   

T-Bills are issued at discount to a £100 par value, and mature over a shorter period than gilts: one month, three months and six months.   

• Everything you need to know about UK Treasury Bills
• Benstead on Bonds: why gilt auction access is a win for small investors

There have been six T-Bill auctions so far this year, with annualised yields peaking at around 5%. The latest auction ended this week, offering annualised yields expected to be around 4.7% on three and six-month instruments.  

Yields are closely tied to Bank of England interest rates, as they are short-term savings instruments, similar to the Bank’s core interest rate. This means that yields are likely to be above 4% over the next 12 months.  

One key advantage is that they offer a fixed rate for shorter periods than gilts, meaning that holding the instrument to maturity may be more feasible than for gilts, which can mature over long periods.   

Investors can therefore lock in a one, three or six-month rate, similar to a fixed-rate savings account, and pick up their return when the bond matures without having to worry about market fluctuations.   

The return profile is simpler to understand than gilts, with all the gain coming on the maturity date and return of £100, whereas a gilt’s yield-to-maturity is a mixture of coupon payments and capital returns or loss when the bond matures. Another advantage is that they can yield more than gilts maturing over a similar period. 

One disadvantage is that there is not a liquid secondary market for T-Bills, so investors are locked in until the instrument matures. 

National Insurance tax hike to cost jobs – or boost inflation 

British companies are in tough position due to higher employers’ National Insurance rates from April, which the government hopes will raise £26 billion. 

To cover the bill, firms could pass on the cost to consumers via higher prices, or they could cut jobs. 

Research group Bloomberg Economics thinks the tax hike on businesses may cost as many as 130,000 jobs if bosses choose to pass on the burden by reducing employment. 

On the other hand, if they instead raised prices to protect profits margins, inflation would jump by up to 0.9 percentage points one year on from April, it forecasts.  

• Don’t be shy, ask ii….why is this inflation-linked bond fund losing money?
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What does this tax change mean for bonds? There are two possible outcomes in my view.  

Higher prices would be bad news for fixed income, as the Bank of England would not be as willing to cut interest rates. 

On the other hand, job losses and a slowing economy would ease pressure on prices and allow for more aggressive stimulus from the central bank.  

Bloomberg Economics believes that in a world of higher unemployment, interest rates may fall faster than anticipated.