Each month, the Ministry of Public Finance is required to issue various government securities in the form of treasury bills and government bonds, in order to obtain short-term or long-term financing. Thus, their purpose is to reduce the budget deficit and, at the same time, support public refinancing. Buyers who wish to own government securities can acquire them through the banking market. The advantages of this investment include the security guaranteed by the issuing state regarding the invested capital and the profits obtained through holding or selling the securities, which are tax-exempt. Investors in government securities may be individuals or legal entities, resident or non-resident. Like stocks, government securities can be held in one’s own investment portfolio or sold to other individuals.
To understand how this system works to reduce the country’s public debt and how it can generate profits for investors, we need to understand:
- what treasury bills and government bonds are;
- how treasury bills and government bonds work;
- what the differences between the two are.
What are treasury bills in Romania?
Treasury bills are financial instruments issued by various specialized institutions, representing ownership rights held by the buyer from the moment of purchase.
In Romania, treasury bills are issued by the Ministry of Public Finance, which is responsible for ensuring that all investors who wish to purchase treasury bills receive interest payments regularly, and that, at maturity, the initial investment is repaid. In addition, treasury bills are considered safe investments because they are issued for short periods of time, ranging from a few months to one year. Their safety is also guaranteed by the fact that the government assures investors they will get their invested money back.
What are government bonds in Romania?
Bonds are securities issued by competent institutions through which they borrow various amounts of money from investors.
Unlike treasury bills, bonds are medium- and long-term financial instruments, with durations ranging from 1 to 30 years.
It should be noted that, in the case of this type of government security, the investment carries a higher risk, which is why thorough information is recommended before investing.
The difference between treasury bills and government bonds in Romania
Although both treasury bills and government bonds are securities issued by the government, there are some aspects that differentiate them:
- Maturity and capital repayment
Government bonds have longer maturities, up to 30 years, whereas treasury bills are issued for short terms, with maturities of up to 1 year.
- The investment risk involved
If we consider the risk involved in bonds compared to treasury bills, we can clearly state that the risk is higher due to the longer maturity of bonds. However, to encourage investment, the Ministry of Public Finance offers a higher interest rate than that offered for treasury bills. Thus, investors are encouraged to take on more risk for potentially higher returns.
- Liquidity
When it comes to liquidity, treasury bills are more liquid because they can be sold more easily compared to government bonds. This is due to the shorter period during which the state repays the borrowed amount and interest to the investor.
Therefore, considering these aspects, we must mention that treasury bills represent investments with a higher degree of safety and liquidity, while government bonds offer the possibility of investment with higher risks, but also with the potential for higher capital returns.
Read more about government securities risks.