Spanish public debt is the protagonist of this 2023. Long queues at the Bank of Spain and strong demand on the Treasury website have put government bills in the sights of retail investors as they yield close to 3%. This Tuesday there will again be an auction of letters for 6 and 12 months. The state hopes to raise up to 5.5 billion euros. But what do you need to know before investing in this new product?

What is a government bill?

Treasury bills government debt securities issued by Spain for its own financing. “The state asks for money and promises that after a while it will return what you have invested, plus an interest rate,” says Vicente Varo, director of content and community for investment platform Finect.

What do I need to do to invest in letters?

The subscription of public debt can be carried out through various channels. The first is through the central headquarters of the Bank of Spain, which is located in Madrid, or through any office of the organization in any Spanish province. Starting this Tuesday, Feb. 7, appointments are required to open a securities account (required for investing in promissory notes), but the furore caused by these products means there are no appointments for a month.

Another option is through the tesoro website, www.tesoro.es, option: securities buying and selling service. A page that has been down repeatedly due to the “boom” and that the Treasury has already announced an improvement in customer service. Finally, a third option for investing in public debt is through financial institutions (banks or savings banks), as well as companies and securities agencies.

To invest you need NIF of all account holders direct (original and copy); credit account details (account where you want the Bank of Spain to deposit interest and amortization); money for investment. Payment can be made during the entire subscription period in cash, bank or certified check or transfer, which will be made no later than the day before the auction, to the payment account authorized by the Bank of Spain for this purpose, which will be indicated at the time of opening the direct account. In addition, payment can be made by blank check from the beginning of the subscription period and up to three business days before the auction.

What is the minimum investment?

The minimum nominal amount for investment is 1000 euros., but the money payable at the Bank of Spain is the previous deposit set before the auction. In the case of letters, the previous deposit is currently 101%, i.e. 1010 euros per title. In the case of government bonds and obligations, the pre-deposit is usually set by the Bank of Spain on the Friday before the day of the auction and must be taken into account when making the payment.

What return do they give you?

In the first auction of 6-month and 12-month bills, Spain placed 4,893.84 million euros with a yield of 2.59% and 2.998%, respectively, the highest yield since 2012. issued debt for 2,052.78 million euros with a yield of 2.198% in three months and 2.839% in nine months.

Victor Alvargonzalez, director of the independent consulting firm Nextep, explains that it’s normal for him to have such high interest rates: “It’s a bit ridiculous that the bank only gives you 1%, while the state, which is the safest debtor, gives you 3% over the same period.” .

As for bonds and obligations (longer-term public debt), they are also issued with a yield of about 3%. For example, on 20-year government bonds with a coupon of 3.45%, the Treasury placed EUR 1,982.77 million, less than the requested EUR 3,657.8 million, and the marginal interest rate was 3.654%.

What tax must a retail investor pay?

According to the Treasury website, income earned between the purchase amount and the sale or amortization amount of Treasury bills, regardless of their maturity, will be taxed at a rate of 19% up to 6,000 euros, A tranche of the taxable base from EUR 6,000 to EUR 50,000 is taxed at a rate of 21%, and a tranche exceeding EUR 50,000 is taxed at a rate of 23%.

Héctor Jiménez, tax expert at TaxDown, explains that both bills and government bonds are movable capital income and, as such, are taxed on the savings tax base, which ranges from 19% to 28%, and is just one of the taxable news this year, as last year the highest bar was 26%.

Only the “benefit” that the investor receives from these products is taxed, that is, by amortizing the bond or bill (the difference between the purchase amount and the sale amount). Jimenez notes that it is important to consider that precious letters (with a period of 3 to 12 months) not subject to retention while government bonds (with a term of 2 to 5 years). Or what is the same as “when making a profit, they will withhold a part if we have acquired government bonds, but they will not withhold anything in the case of promissory notes,” he points out.

Can a retail investor be excluded from the auction?

At all auctions that were held this year, demand exceeded supply, even twice. In this situation, the question arises whether the retail investor can be left without the opportunity to invest in government bills. Treasury sources indicate that all non-competitive requests (for example, retail investments) that are received on the date are fulfilledno one will be left without your request if everything is correct and the translation is done.

Vicente Varo explains that there are 2 ways to access the auction: The first is a competitive offer: the bidder must indicate the price he is willing to pay for the bond. “There, depending on the price you quote, you can “stay out” of the auction or not, depending on whether the price you “asked” is above the market price or not,” says Varo. The second way to access an auction is through a non-competitive bid: “here you just take the weighted average price of the auction, whatever the outcome. This is the easiest option for a retail investor,” he notes.

Is it a safe investment?

Victor Alvargonzalez, director of independent consulting firm Nextep, explains that this product is the safest. In addition, it is emphasized that public debt is guaranteed by the stateso that not only the 100,000 euros of the Guarantee Fund guaranteed by the banks are protected, but any amount, “unless the state goes bankrupt, which is hardly possible in Spain”.

Finect’s content director explains that public debt is not the same thing. “Investing in the public debt of a country like Spain or Germany is not the same as investing in a developing country”, dot. For this reason, he recommends always looking at the yield offered and whether it is more or less likely that the government will default on its debt. With Treasury bills, the risk is lower because they have a shorter term than obligations and bonds. Therefore, they are an attractive financial product for conservative investors who do not want to take much risk.

Can you find a product with little risk and the same return?

Typically, this type of investor resorted to deposits, but Spanish banks still do not offer rewards for these products. Varo elaborates that there are some foreign deposits in the market that offer similar returns, but as Alvargonzalez points out, the banks that offer these deposits are not large institutions. Nextep’s chief financial officer believes that rewarding deposits is what will eventually happen, but it will take time “because banks don’t need liquidity.” However, he points out that the state may recommend that they do so to avoid long lines.

Finect’s director explains that there is a product in the world of investment funds that right now could be even more profitable than promissory notes with similar risk, namely cash. “In fact, what they do in practice is they buy both government debt and corporate bonds of very high quality, and also for very short periods,” he points out. The disadvantage of cash compared to letters is that at first you don’t know exactly what kind of return you will get; The advantage is that if you need to return the money, they are easier to sell than bills.

Victor Alvargonzalez agrees with Varo and assures that if an investor chooses a good cash fund that invests not only in government debt but also in other products such as corporate debt, he will receive a higher return than in government bills.

Can the yield fall with such interest from the investor?

With inflation as high as it is now, it is not good to leave money in a bank account without making any profit. “3% with minimal risk is an interesting return, although it can be improved with very conservative short-term fixed income or cash.”, explains Vicente Varo. This is good for the state, because in this way the private demand of citizens is covered by the gradual exit from the market of the European Central Bank, which in recent years has been the main buyer of debt.

Jesús Saez, head of DCM at Natixis Iberia, explains that rates will be adjusted and yields will increase, and this will be reflected in the interests of retailers “not institutional because it is good to have this type of product. portfolio due to its liquidity.

Profitability was negative a few years ago, can this happen again?

“It’s possible, though unlikely in the short term,” Varo says. To do this, the European Central Bank needs to cut interest rates back to negative levels. And for this it is necessary that economic growth collapsed, and inflation almost completely disappeared. “Unless we have a new big, dramatic and unexpected crisis in the near future, the negative exchange rate anomaly will become history,” the expert says.