When what you are looking for is security, investing in public debt has few rivals. Its very low risk — and a return that, depending on the context, can be attractive — make it a very popular investment option. However, like any financial instrument, investing in public debt has its pros and cons. It is usually especially relevant for conservative profiles or for those looking to protect part of their wealth from volatility. In this article, we explore the main ones.
What is public debt?
Public debt consists of fixed-income securities issued by the State, autonomous communities or other local governments and, in general, public bodies. In Spain, there are two broad categories. On the one hand, State debt, which includes Treasury bills and government bonds and obligations. On the other, regional debt — which is also State debt — and debt issued by other public bodies. For the investor, this means lending money to a public administration in exchange for a previously defined return.
Types of public debt
These are the main public debt instruments in Spain:
| Instrument | Term | Interest payment | Minimum amount | Practical key |
|---|---|---|---|---|
| Treasury bills | Three, six, nine or twelve months | No coupon, purchased at a discount | One thousand euros, in multiples of one thousand | Short-term option with high liquidity |
| Government bonds | Two to five years | Fixed annual coupon in most cases | One thousand euros | Predictable income stream |
| Government obligations | From seven years | Fixed annual coupon | One thousand euros | Long horizon and greater sensitivity to rates |
| Regional and public body debt | Short or long term | Depending on the issue | Usually one thousand euros | Similar conditions to State debt |
Treasury bills
In Spain, the rise in interest rates has boosted the appeal of public debt, particularly Treasury bills. These securities are characterised by their short term — currently 3, 6, 9 and 12 months — and by being issued at a discount. In other words, their return comes from the difference between the purchase price and the nominal value on the redemption date. The minimum investment is 1,000 euros, and investments must always be made in multiples of that amount.
Government bonds and obligations
Government bonds and obligations, on the other hand, are medium- and long-term fixed-income securities. For bonds, the redemption term is between 2 and 5 years; for obligations, the minimum is 7 years. These assets do pay periodic interest in the form of a coupon. Normally, the interest is fixed and paid annually. Again, the minimum investment is 1,000 euros.
Regional debt and debt from other public bodies
Regional debt and debt issued by public bodies can be short or long term. Otherwise, they do not differ substantially from Treasury bills and government bonds and obligations.
The main appeal of public debt is security. The most obvious disadvantage is the reflection of that low risk: low returns. That said, in an environment of relatively high interest rates, public debt is an interesting alternative to other conservative products, such as bank deposits.
The choice between these instruments will mainly depend on the investment term and whether the investor is seeking liquidity or periodic income.
Advantages of investing in public debt
These are some of the main advantages of investing in public debt.
Security and stability
Public debt is issued by the State, which makes it one of the safest forms of investment. Government bonds, Treasury bills and obligations are backed by the Spanish State, which minimises the risk of default.
Although Greece came close to defaulting as a result of the major 2008 crisis, it is very rare for a State to fail to service its debt. In fact, the country ultimately secured the support of the European Union, which prevented it from defaulting on its obligations.
Fixed return
Investing in public debt provides constant and predictable income — the kind sought when one wants to live off income. Interest is paid regularly, allowing investors to plan their finances with greater certainty.
In high-interest-rate environments, Treasury bills can offer more attractive returns.
Portfolio diversification
Including public debt in an investment portfolio can help diversify and reduce overall risk. This is especially useful during periods of market volatility, as government bonds tend to be less volatile than equities.
Access
Public debt is accessible to all types of investors, from small savers to large institutions. In Spain, investors can easily acquire these instruments through banks and online platforms.
Disadvantages of investing in public debt
Investing in public fixed income also has some drawbacks worth considering.
Low returns
One of the main disadvantages of public debt is that it usually offers lower returns compared with other types of investments, such as shares or investment funds. The biggest problem is that the return they offer may not be enough to offset inflation. And there is also the difficulty of taking advantage of the potential of compound interest.
Interest rate risk
Bond prices are inversely related to interest rates. If interest rates rise, the value of bonds on the secondary market will fall, which may result in losses if the investor decides to sell before maturity.
Liquidity
Although public debt is generally liquid, certain types of instruments, such as long-term obligations, may not be as easy to sell quickly without incurring losses. This can be a disadvantage for investors who need quick access to their money.
In conclusion, investing in public debt can be an effective strategy for those seeking security and stability in their investments. Likewise, for those looking to diversify their portfolio and reduce risk, public debt can be a valuable option. However, to maximise benefits, it is advisable to combine it with other asset classes that can offer higher returns and help mitigate the effects of inflation and market fluctuations. For example, the real estate sector…
When is it worth investing in public debt?
Public debt may be a better fit for investors who prioritise stability over returns, or who seek to protect part of their capital in uncertain environments.
It can also be useful as a complement within a diversified portfolio, especially to balance more volatile assets.
Conclusion
Public debt provides security and a clear payment schedule, which is why it fits well when you want to stabilise your portfolio and plan objectives with a specific date. Its limitation lies in returns and sensitivity to interest rates, so it helps to combine different terms, reinvest with judgement and complete the portfolio with assets that provide greater potential without moving outside your investor profile.
Frequently asked questions
What term should I choose when investing in public debt?
Align the maturity with your objective and the liquidity you need: use Treasury bills for short-term goals and bonds or obligations if you are looking for periodic income and a longer horizon.
How can I estimate the real return?
Start with the nominal return and subtract expected inflation. Add the effect of fees and compare the result with alternatives of similar risk.
What fees should I watch out for?
Keep an eye on three items: buying or selling fees, custody fees and market charges. Ask for the total amount in euros before investing and deduct it from the estimated return. In short terms, a small fee can eat up a large part of the yield.
Is public debt guaranteed?
Public debt is considered a low-risk investment because it is backed by the State, but it is not a guaranteed product in the sense that there is no formal coverage as there is with bank deposits.
