The V.K. and V.S. Treasury bill markets An article in the September 1964 Bulletin they money dealers in the sense that the Lon­ discussed the U.K. Treasury bill and the ways don discount houses are. They are not nearly in which it is issued. The present article com­ so dependent on the banks or any other single pares the markets in Treasury bills in the source for their funds, and they do not reckon United Kingdom and the United States, con­ to provide bills primarily to the banking sys­ siders the part such bills play in the two tem; their business is with the general public countries in public finance, and discusses the to whom they sell a wide range of securities, extent to which this form of debt is held out­ including bills. The banks tender for bills for side the banking sector. their own account, and so actually compete In comparing U.K. and U.S. Treasury bills, with the dealers in the Treasury bill market. it soon becomes clear that, although the two Another important difference between the instruments have the same name and are two markets is that in the United Kingdom the basically similar, the two bill markets are in Treasury bill has to meet much stronger com­ fact distinctly different in structure and opera­ petition from within the public sector. This tion. In the first place, the London bill mar­ competition comes from the short-term debt of ket tends to be more specialist than its counter­ local authorities, which gives a higher return, part in New York. It is essentially a market and which has grown so much in recent years. in money for which bills are convenient col­ In the United States, state and local govern­ lateral; it provides the banks with liquid assets ments are financed largely through long-term and with the means of converting liquid assets bonds. There are of course many alternative rapidly into cash. The banks find it convenient outlets for short-term funds in the United to deal with specialist firms which will supply States; but they are mostly not in public-sector them with Treasury bills and with which they debt, and in general are not so competitive can deal in day-to-day money. At the same in yield as local authority debt in the United time, these specialist firms, or discount houses, Kingdom. run a substantial inventory of bills and look A third important difference is that U.K. to the banks as their main outlet; indeed, they Treasury bills normally have a life of no more must give the banks first call on their port­ than three months, whereas U.S. Treasury bills folios if they are to stay in business. Before are issued either for three months, six months. the growth of the Treasury bill issue the houses or a year. met the banks' requirements by running com­ These differences alone-without mentioning mercial bills, but for many years now the others which will appear later-are enough to Treasury bill has supplanted the commercial suggest that the distribution of Treasury bills bill as the prime liquid asset. By contrast, in the two markets among the various holders the houses dealing in bills in New York are may be dissimilar. None the less the instruments general security dealers with a network of themselves are fundamentally alike. In both branches and representatives in financial centres countries they fulfil the same function: they are throughout the country. Dealing in bills is the principal means through which the central not a predominant part of their business; they government obtains short-term finance from the do not aim to carry a large inventory, nor are market, and their yield is the standard indicator 327 of short-term interest rates. In both countries authorities (local authorities in the United too, Treasury bills not only offer the highest Kingdom; federal agencies, state and local security but can be immediately discounted in governments, in the United States). the market for cash; for this reason they are the Estimates of market holdings of different prime instrument in which foreign central kinds of public-sector securities in the two banks and other foreign official institutions countries are shown in Table 1. In the United invest their dollar or sterling holdings. It may Kingdom, with its more centralised form of also be noted that, in spite of the very different government, nearly 80% of the public-sector structure of government, the proportion of debt is issued by the central government com­ public-sector debt (taking into account both pared with less than 70% in the United States. central and local authorities) raised in the form But in spite of this, as the table shows, the value of Treasury bills is much the same in the United of Treasury bills outstanding in the market States as in the United Kingdom. forms a slightly lower proportion of total public-sector debt in the United Kingdom (11%) than in the United States (14%). Role in The Treasury bill issue can Since 1960 the Treasury bill issues in the two public finance first be related to total countries have moved in different directions. issues of securities by the public sector, that is The U.S. Treasury have been expanding their by the central government and other public use of Treasury bills in preference to bonds, Most of the U.s. figures given for purposes of comparison in this article are estimates, calculated from a variety of sources (particularly the Federal Reserve Board's Flow of Funds Accounts, and the U.S. Treasury's Survey of Ownership covering federal government and federal agency securities). Table I Public-sector securities held in the market(a) United Kingdom United States 30th Sept. 1964(b) 31st Dec. 1964 £ millions % £ millions % Central government: Treasury bills 2,978 11 16,034 14 Tax reserve certificates (U.K.) or tax anticipation bills (U.S.) 383 ] 1,352 1 Marketable government stocks (including government guaranteed) ... 14,288 5] 41,150 35 National savings securities (U.K.) or savings bonds (U.S.) 3,767 13 17,759 15 Other non-marketable government debt ... 580 2 2,668 2 Federal agencies 4,327 4 State and local governments ... 6,038 22 33,679 29 28,034 100 116,969 ]00 (a) i.e., outside the Bank of England and the Federal Reserve Banks, the U.S. and U.K. central governments and (in the United States) federal government agencies and trust funds. (b) 30th September 1964 has been chosen for the United Kingdom here and elsewhere in the article because it is halfway through the financial year, before the seasonal build-up in Treasury bill holdings has reached its peak. Seasonal fluctuations in Treasury bills in the United States are not so marked ' and the end-year is a convenient date. 328 both to support short-term interest rates for much more highly developed market in the balance of payments reasons and to hold down short-term debt of local authorities accounts long-term rates in the interests of domestic for as much as a third of the total. In the expansion. From December 1960 to December United States the state and local governments 1964 Treasury bills in the market rose by £5,800 can usually attract long-term money easily million(l) (though at the same time the average because the interest on it is free of federal maturity of government debt was gradually income tax. About 95% of their debt is there­ raised by advance refunding techniques). On fore in the form of long-term bonds, and they the other hand the U.K. Government, through issue short-term debt only in small amounts in their policy of selling other securities, have anticipation either of revenue or of sales of such steadily reduced the value of bills in the bonds; these issues seem to fluctuate rather market-from £3,387 million in September erratically. On the other hand, certain U.S. 1960 to £2,978 million in September 1964. federal government agencies, particularly the Since then there has been a further sharp fall Federal Home Loan Banks and the Federal (the figure for September 1965 was down to Intermediate Credit Banks, issue fairly large £2,484 million) but this reduction was largely amounts of short-term debt, accounting for 11% due to the external situation. of the above total. To these there is no counter­ Treasury bills can be related to the total of part in the United Kingdom. short-term public-sector debt as well as to the It should be noted that in the United King­ total debt of all maturities. This is done in dom the public sector is more extensive and at Table II, which is limited to debt with an the same time more homogeneous than in the original life of no more than one year (except United States. It includes, for example, a fair­ tax reserve certificates, which earn interest for a sized portion of u.K. industry; since the mid- maximum of two years but can be used for 1950's these nationalised industries have not paying taxes at any time). borrowed from the market, but have looked to A comparison of Tables I and II shows that the Exchequer to finance that part of their the proportions of short-term debt to total debt capital development which they cannot finance are almost identical in the two countries: 18% from internal resources. As a result, there is a in the United Kingdom and 19% in the United relationship between the borrowing needs of States.