What Is a Bill Market?

The bill market is part of the financial system in the U.K. Also referred to as a discount market, the bill market is the channel where new money is supplied to the economy through the Bank of England. It is equivalent to the Federal Reserve system in the U.S. Based on decisions made by the central bank, which is the Bank of England, the issuance of money and credit is managed.

In addition to the Bank of England, there are dozens of other financial institutions, known as joint banks, that help to comprise the financial system and bill market in London. These banks are operated as separate branches. The money that is held by these financial institutions becomes available to the London money market system, which is where loans with short-term durations are issued. Participants in the bill market include institutional investors, such as insurance firms, corporations, and private lenders.

Throughout the U.K, a discount house, or bill broker, is a firm that participates in the bill market. It purchases various financial products at a discount, including banker's acceptance and commercial paper, for instance. This institution could be involved with applying for treasury bills that are issued on behalf of the U.K. government.

Governments, for instance, might issue short-term debt with a particular face value. A discount house might participate in the bill market by applying to pay for that treasury instrument for slightly less than the face value amount. In the meantime, the government gains access to some money, and the discount house profits from the difference in the price between the face value and the purchase amount.

Liquidity in the bill market refers to the ease and efficiency at which treasury bills can be traded. This can be measured based on the price that was paid for a debt instrument, or bid, and the value at which the same financial security is sold, which is the ask price. The difference between these two components is the spread, and it gives market participants a sense of how liquid this market is currently.

A bill market is an arena where debt transactions occur. In response to extending a loan or an item based on credit, for instance, a commercial bill may be issued to the borrower. Included in this document are the details, such as the expiration date for the loan and the total amount due the lender. These credit transactions are typically short term in nature and expire after a period of months.