Editor’s note: This article was first published in August 2011, and its figures are from that month: deposit rates of 2.50-3.50%, Treasury bill yields of up to 3.70% and the savings income tax rates. Spanish rates and tax brackets have changed several times since, and the rules on buying Treasury bills describe 2011.
With market volatility running high in the dreaded month of August, many small investors and savers prefer to take refuge in safe investments. Conservative investors’ favourites are Treasury bills (Letras del Tesoro, Spain’s short-term government debt) and fixed-term deposits. Surprisingly, people are choosing the fixed-term deposit, when right now Treasury bills are the better investment, both in yield and in tax treatment.
Some people think that, with fears of a possible bailout of Spain, Treasury bills will be riskier than deposits, when in fact the risk is about the same. The government guarantees deposits up to €100,000, while the guarantee on bills is unlimited, and in the end, if the government itself can’t pay back its Treasury bills, the Deposit Guarantee Fund won’t be able to pay either. With deposits, the first party liable is the bank that sells the product, followed by the Deposit Guarantee Fund. In the event of a default, however, both would become risky products.
As for yield, with the risk premium rising, Treasury bills now pay more than fixed-term deposits: deposits pay between 2.50% and 3.50%, while you can buy Treasury bills yielding up to 3.70%.
On taxes, both products are taxed under IRPF (Spanish personal income tax) as savings income: 19% up to €6,000 and 21% above that. The difference is that the bank withholds 19% of your deposit interest on account of IRPF when it pays it, whereas Treasury bills carry no withholding at all.
Banks used to offer their customers Treasury bills, but these days they are obviously far more interested in selling you an investment fund or a fixed-term deposit. And if you buy Treasury bills through a bank, bear in mind that some charge a custody fee, which you can avoid by going to the Bank of Spain in person and investing without an intermediary.
Besides weighing the usual criteria for choosing an investment product, such as yield, risk, taxation and liquidity, there is another one worth considering today.
When you invest in fixed-term deposits you are helping the bank financially, and when you invest in government debt (bills, bonds…) you are helping the state.
For more complete and detailed information on investing in Treasury bills and deposits, see this article on Invertia.
Further reading
- What a US default would mean for the world economy
- A new crisis in 2012: the end of the world as financial chaos
Featured image: Edgardo W. Olivera, CC BY 2.0, via Flickr.
