Post-Lehman Deja Vu As T-Bill Yields Turn Negative

[AllentownJake]

The last time Bill yields turned negative (in essence investors paying the Government to hold their money for them) was in the days after the Lehman bankruptcy, when the entire world was about to blow up. So why did Bill yield for January maturity just turn negative once again? In other words, why are investors suddenly running for the hills? As Dow Jones reports, January and February bills hit a yield of -0.03% earlier. Some explanations have to do with Bill scarcity, as nobody wants to be exposed to anything beyond 3 months down the curve, let alone 1 year. However, the fact that bond investors may not be buying into the whole recovery BS (or just realize that there is nobody willing to roll near-dated treasurys into longer-tenor pieces of paper) and are once again running scared and willing to pay Ben Bernanke to hold their money for them should be very, very troubling. Additionally, could there be something more pressing and/or catalytic? We have not heard peep from any of the big banks in a while...

http://www.zerohedge.com/article/post-lehman-deja-vu-t-bill-yields-turn-negative



Not sure what is going on here. Lots of speculation on the blog. Everything from some big player is about to blow-up to foreign central banks increasing their T-bill holdings as part of some prescribed planned action.

[Newsjock]

1. WSJ story here

http://online.wsj.com/article/BT-CO-20091119-714012.html

NEW YORK (Dow Jones)--Some Treasury bills maturing at the start of next year traded at negative rates Thursday, a sign of investors' strong demand for the safest securities at a time when T-bills are in scarce supply.

When market participants buy Treasury bills at negative rates, they are essentially paying the government to keep their money safe.

Rates on issues maturing in early January and February turned negative Thursday, to as low as -0.03%, traders said. Some issues maturing in the first two weeks of December also slipped, trading at flat to a bit negative Thursday.

... Rates on bills three months and out, though, were still trading positive Thursday. Strategists, however, said they wouldn't be surprised to see those rates turn negative as well.

[AllentownJake]

2. Something is going on or is about to happen

and the rest of us have no idea what it is.

[CoffeeCat]

3. and we can only guess...

...because the media has been spinning the economy into a green-shoot carousel of sunshine and unicorns--since the
recession hit.

It's almost impossible to know what the score is, but we can guess.

It's obvious that the banks we bailed out are still insolvent. We gave them billions so they could get
the toxic assets off their books and start lending. Results...toxic assets still on books, banks aren't
lending, if anything they are more conservative than ever, when it comes to lending.

A new wave of foreclosures is on the horizon. I imagine the banks are going to want to feed at the trough
again, and I imagine that won't bode well for any economic indicators.

I don't think the consumer is playing along as well as Wall Street would like. We drive 70 percent
of our economy, and we're just not buying stupid stuff on credit and with home-equity loans any longer.

I feel a strong wind is being blown through this economic house of cards.

Are we ready?

[AllentownJake]

4. The only logic in parking your cash in a paper that will guarantee you will make less

than what you put into it is that you are concerned that a financial institution that you would allow to handle your investment would not only not pay you a return but would eat your total principle.

This is not boding well for the economy, nor does it bode well for anyone trying to say TARP saved the world if a year later, investors are willing to take a loss on guaranteeing their money in holding government bonds, vs. placing their money in a financial institution they fear might blow up and destroy their principle.

There is no political will for a second bailout.

[CoffeeCat]

6. True...

...so maybe it all comes crashing down this time.

The elites and those "in the know" have obviously been told to take cover.

[AllentownJake]

7. Who knows but people are building Financial Fallout shelters

On the plus side, they think the US government will still exist.

[WCGreen]

8. That's a big plus...

[CoffeeCat]

23. Yes! At least the government will still be standing...

I wish I knew what this meant.

I understand that there is a greater demand for t-bills, thus pushing % rates down.

The article does a superfantastic job of spinning the reason for the negative rates. Basic supply
and demand forces at work. Notice how the corporate media is very careful to let us know that
this is not bad news, "Nothing to worry about, people of the world!". They go even further to
"explain" to us that yes, this may have happened before the collapse of Lehman, but this time--it's
just no big deal.

(Nothing to see here, sheeple!)

What's missing from the article is any sort of analysis about the WHY. Why are people willing to
pay to have their money parked in a safe place? What's going on behind the scenes? And who
is driving the higher demand for t-bills? Are these big investors? Average investors?

Also, there is no mention of the devastating consequences of this behavior. Money pouring into
t-bills isn't invested in private enterprise. That hurts the economy (but please, dear sheeple,
do not think about this. Just watch the shiny object--Wall Street's happy-spin analysis of these negative
interest rates).

I look forward to seeing further analysis of this article. Maybe Denninger will take a crack at it.

[SlipperySlope]

11. There is another logic...

A foreign government that believes the dollar is about to appreciate could buy T-bills. The negative interest rate would be more than offset by the gains (in local currency) that would be realized.

Why T-bills instead of some other instrument? Zero counter-party risk. Foreign governments have learned (via Fannie and Freddie) that if it isn't a US government note, it doesn't have an explicit promise.

[AllentownJake]

12. They would just buy dollars and deposit them in their own banks

and there are plenty of people willing to sell them to them right now.

Why take a charge when you can just buy the actual currency and place it in your bank?

[SlipperySlope]

13. Buy the actual currency?

I don't think you really meant what you wrote.

Say you want to purchase $20B in US currency. That would be two hundred million $100 bills. That would be almost 450,000 pounds of currency. You seriously want to transport and store that?

Edit: For most normal intents and purposes buying US treasury bills is considered the same as holding cash. Even if you found the idea of the negative interest rate offensive, it may be far easier to just purchase bills if that is what your central bank is set up to do.

[AllentownJake]

14. China is sitting on 3 trillion in cash

What do you think that is all in physical currency? It is in the form of a balance on a computer chip.

Many nations are sitting on large US dollar reserves, you need it to purchase oil...the petro dollar.

3% of the dollars in the world actually exist in physical form. 97% of it is nothing but an entry on a computer.

[SlipperySlope]

15. You are just pushing the problem down a tier.

All circulating dollars (even dollars that are entries on a computer) are backed by some piece of debt somewhere.

If you choose to hold your dollars as an "entry on a computer" then someone else is holding the debt that backs those dollars. If you aren't going to hold the debt personally then you are going to accept the counterparty risk, and this whole hypothetical exercise was about avoiding that risk.

Edit: I'm not saying this *is* the answer, only that it is a viable alternative explanation. See the title of my original reply...

[AllentownJake]

16. A dollar in physical form is a piece of debt

A debt backed on nothing but a debt none the less.

Even if you directly buy the T-Bill they don't issue the physical forms anymore unless specifically requested. They are entries on the FEDs computer. If you buy a 3 month Treasury all you are getting is an entry in the FEDs database with your name on it, if you sell it, they change the name. When the bill matures, they transfer the proceeds of the bill via a computer entry to your bank.

[SlipperySlope]

17. You already said you don't want to hold the paper?

You already said that you aren't talking about holding paper currency, so the debt backing paper currency isn't germane.

Let's back up. You are a foreign government. You want to purchase $20B USD. How are you going to do that in practice?

Normally you would just have your central bank or your treasury purchase $20B in US Treasury bills. I already pointed out that despite the negative interest rates the easiest thing to do would be to follow your normal procedure. Especially if you got the ball rolling on this a few days ago before rates turned negative.

For some reason you keep insisting there is some magical way that you can purchase $20B without either holding the bills yourself or accepting some level of counterparty risk. How, pray tell, are you going to do that? Please be specific and don't just wave your hands and say it is all magically done with computers.

They are entries on the FEDs computer. If you buy a 3 month Treasury all you are getting is an entry in the FEDs database with your name on it, if you sell it, they change the name.

You are confusing the US Treasury and the Federal Reserve. But I'll ignore that.

If you wanted to purchase treasury bills directly from the US Treasury you would first have to have US dollars to purchase them with. But since you are starting with Yen or Francs or Euros or whatever you would have to go through the FX markets to get those dollars.

Your assertion is that you would stop there. Once you held the dollars (in some non-paper form) you wouldn't bother buying the treasury bills. But if you don't buy the bills, then you don't really hold the dollars in any form that gives you protection from counterparty risk. If you aren't holding bills backed by the US Treasury, then you are holding some ledger entry that gives you a claim upon the assets of some US bank. In other words you are only holding $20B because you have a computer ledger entry where Citibank, or Bank of America, or whoever your counterparty is promises to pay you $20B. And that exposes you to counterparty risk (what if Citibank or BoA goes tits up).

Ultimately there are only two ways to hold dollars without counterparty risk. You either have to hold an instrument (note, bill, bond) that is backed by the US Treasury -OR- you have to hold the actual paper currency. If you don't hold either of those, then you don't actually have any claim on those dollars. All you have is a claim on whoever *is* holding the instrument or the currency.

[AllentownJake]

18. I see your point

and I will say this, TARP has failed if one year later there is still enough fear in the market that there is significant enough counter-party risk that you need to put your money in T-bills to the point you are getting a negative return.

Also I believe that most countries own or have a bank subsidiary in the US. If you are worried about an American Bank, putting your money in one of your own countries banks that operates in the United States is always a possibility, unless you are worried about a total systematic failure.

So if you are England you have Barclays, the Japanese have banks in New York, as do the Chinese. You have American branches that are subject to your regulations at home.

This more looks like private investor activity than the activity of a government or central bank.

[EmeraldCityGrl]

36. Doesn't FDIC Insurance protect the average bank customer?

Thanks in advance. I'm trying to understand all of this.

[AllentownJake]

37. Up to $250,000

$100,000 under normal economic conditions.

To me I interpret this as a sign that the big boys with a shit load of money don't have any faith in the US banking system.

[EmeraldCityGrl]

39. FDIC recently requested larger donations from the big banks due

to the number of failed banks. Also not a good sign.

[AllentownJake]

41. Oh the original FDIC fund is insolvent

They've closed way too many banks for way too big of losses this year not to be. Right now they are collecting future premiums to try to avoid having to go to congress and having a line of credit extended to them.

[SlipperySlope]

38. Up to $250k - which doesn't help if you are trying to protect billions.

The average bank customer with less than $250k in deposits will be protected by the FDIC insurance. This is assuming that the FDIC remains solvent, which it likely will, since the US Government isn't likely to let the FDIC go broke.

But for the discussion above we were talking about hypothetical transactions on the scale of billions of dollars. The FDIC isn't going to cover that, which is why if you have billions of dollars to worry about you might want to think carefully about the risks of who you entrust it to.

Here's some fun thoughts about the FDIC to think about:

The FDIC insures about $4.5 Trillion in bank deposits. By law the FDIC is required to maintain reserves of 1.15% of insured deposits. That means that by law, the FDIC should have about $51 billion on hand to cover bank failures. As of this August the reserve was down to about $700 million. That means that for every insured deposit dollar the FDIC had less than 2% of a penny to cover it.

Since then the FDIC has pulled a few rabbits out of the hat to get the reserves up, but those tricks aren't sustainable. The system is under immense pressure right now; the average citizen has no idea how dangerous things are.

Here's a video from the Chairman of the FDIC meant to "reassure" you:

http://www.youtube.com/watch?v=7BxiEJcOoo0

I particularly love the part that starts around 1:45 which ends with her saying "We are the government ... we cannot run out of money." Hell yeah Sheila, you can just get your buddy Ben to print all you need.

[AllentownJake]

40. I'm looking forward to Black Friday

Something tells me it is going to be the biggest bank close Friday yet. The only better days to dump bad news is December 26 on a Friday and the Friday before Superbowl Sunday.

[SlipperySlope]

43. Here's #1

Here's #1: http://www.fdic.gov/news/news/press/2009/pr09211.html

[AllentownJake]

45. 26 million dollar loss is one of the smaller ones

Next Friday should bring another billion dollar loss one, someone at the FDIC will be working Thanksgiving.

[EmeraldCityGrl]

42. I watched the video. Very disturbing

that they foresaw the need to even produce it. Spoken in that sing-song voice you would use to a
person poised to jump off a cliff.

Thank you for this thread. Great source of information.

[Liberal_in_LA]

10. scary times

[Extend a Hand]

5. I'm pretty sure it's nothing good. n/t

[AllentownJake]

9. When people start buying investments that guarantee a negative return

and only have the positive of being secure, yes, I'm very sure it is nothing good.

[Statistical]

30. It is good. Means the treausry dept is doing their job.

Nobody wants long term debt right now. Everyone wants short term debt.

The fed could flood the market with short term debt and drive yields up however that doesn't help taxpayer.

Yields on 5/10/30 bonds are historically low right now. The taxpayer benefits by having people lock in low rates for long period of time. How do you get them to commit? Make it too expensive (in terms of low or negative) short term rates.

[AllentownJake]

35. Is this good for the overall economy

More debt being gobbled up by the government is investment that is not flowing into the private sector.

Correct me if I'm wrong? So if you are going to spend more than you have as a government you should make sure the things you are spending it on have a good societal/economic impact.

[Dreamer Tatum]

19. How about I-N-F-L-A-T-I-O-N? NT

[AllentownJake]

20. Why would you buy a T-bill that has a negative yield today

if you thought there was going to be high inflation? Wouldn't that in fact make the yield have even a further negative yield?

[notesdev]

21. It means the fecal matter has an appointment with the rotating blade

and people are hiding behind T-bills hoping not to get splattered.

[Statistical]

29. Because the chance of inflation in next 3 months is essentiall 0.

Also in inflationary environment the face value of bonds fall and you will lose BIG however you can avoid that if you hold to maturity.

In an inflation spike holding 3 months bills is far superior to holding 5/10/30 year bond.
The 3 month bills mature and you can roll them into higher interest bills.

Some investors locked in 15% of 30 year bond in 1983. The govt is still paying that. 30 years of 100% guaranteed 15% return. Not too shabby huh?

Had you locked in a 3% longer term bond just before that spike you would have had two lose-lose choices
a) sell the bond at substnatial loss (30%+ of face value) to buy higher yield bond
b) hold the bond and earn negative return (3% return in 6% inflation enviroment = -3% real return) for years

Had you been holding a 3 month bill you could wait for it to mature, collect dollars from Treasury and turn around and lock in 30 year bond at 15%.

Big money can't hold dollars directly (due to risk of bank failing). 3 month bill = dollar substitute with virtually no risk. Think of the negative interest as an insurance premium.

[unblock]

22. most likely the explanation is fairly benign. the stock market has obviously gotten ahead of itself

and so many investors are taking money out of equities and putting it into bills.
they expect a short-term (maybe large, maybe not, but highly probably in any event) correction and then to get back into equities.

if you're planning to jump right back into equities, why bother taking on interest rate risk for a month or less by shifting to longer-term debt? just park it in bills an don't worry about it.

i don't think there's anything of greater significant to be read into this situation.

[AllentownJake]

24. There are other short term instruments

Cash, commercial paper, etc.

[unblock]

25. we're talking about tiny differences in rates over a short period of time.

cash vs. t-bills? for a difference of 0.03% over the course of a month, forgetabout it.

cp pays positive interest, but it's still very small. again, over the course of a month, why bother taking any risk at all for one month on an annual rate of something like one percent?

[AllentownJake]

26. There might not be any big event

However, the fact people are still seriously concerned about counter-party risk is very interesting.

[Statistical]

28. All of which have default risk. Would be kinda crappy

if you took money out of market into commercial paper to protect yourself from a 20% correction and then have company go bankrupt and you lose 100%.

T-bonds have essentially 0% default risk.

Big money considers the negative interest an insurance premium.

There is a lot of money on sidelines and Treasury is swapping large amounts of short term debt (as they mature) with longer term debt to steepen the yield curve.

flat yield curve = small change between 3 month bill & 30 year bond
steep yeild curve = large difference between 3 month bill & 30 year bond

If you are the treasury right now why not swap short term debt for long term debt while rates are at historical lows. Every 30 year bond the govt locks in at <4% saves taxpayers billions.

This is just supply & demand at work
reduced supply = govt favoring longer term treasuries
increased demand = people looking to park short term money

[Statistical]

27. Big investors have few choices on where to put cash. Supply & Demand is working.

If you or me are afraid of higher risk investments (stocks) and don't want to hold longer term bonds (due to inflation risk) we can take $100K and put it in a bank account so the idea of negative interest seems silly.

Large investors (pension funds, hedge funds, high net worth individuals, foreign govts) may have $20 million or $20 billion in cash. They can't just leave it in a bank. Bank goes bankrupt and they lose 99.9999% of their money.

Right now there is huge risk in holding longer term treasuries. Inflation is coming. Is it coming in 6 months, 1 year, 2 years? Nobody knows but it is coming. When inflation comes yields on new bonds rise and price of existing bonds fall. It is possible to lose 10%-30% in treasuries due to falling face value.

So big investors see the negative interest rate as an insurance premium. A safe place to put money in a holding pattern. As long as we have trillions of dollars on side lines (due to risk aversion in market) we will see near 0% short term rates on T-bills.

[MilesColtrane]

31. TED spread rising too.

Signs of an overvalued equities market about to come down to earth.

[A HERETIC I AM]

32. So how much exactly would it cost to buy a single, $1,000.00 par 90 day T-bill....

if the yield is as stated on the chart in your OP? Any idea?

How about $1,000,000 worth?

Better yet, how much would you lose in dollar terms if you bought $1,000,000 of those notes and ran them out for a year at that same yield?

I'm asking this because I don't think too many that have responded to this thread really understand how much you're talking about in terms of actual dollars.

FWIW, I saw this thread early this AM but had to leave so I bookmarked it in order to put up this post.

On edit to add that I just got a quote from a friend of mine at a bond desk on a T-bill maturing on 2/4/10.

[AllentownJake]

34. If the yield is negative

You are paying the same amount or near the value of the bill upon maturation less current inflation is my reading of this.

So if you are buying a T-bill right now and you factor in inflation to the amount you get for holding the bill to maturity your yield is negative.

I don't have my calculator but the way the auctions typically work is the Treasury will put a T-bill at there for 990 for a 30 day and than pay the owner $1000 at the maturity date.

Please quote me what the actual price is.

This shows though that investors feel insecure that they are willing to take less risk for no-return.

I read this as TARP failed. Correct me if I'm wrong.

[A HERETIC I AM]

44. Bloomberg's website is currently quoting 90 day paper at .01

Which is a positive yield.

Here's their Government Bond page

They don't quote 6 digits to the right of the decimal on that page but I can only assume if the yield were flat or negative they would show it as zero or have a negative sign in front of the quote.

Here is the recent Auction results page From Treasury Direct. Note they show the 13 week paper (90 day notes) as having a "discount rate" of 0.065% and a "Price per $100" of 99.983569. That note matures on February 18, 2010 (The second one down from the top, the most recent auction).

The yield figures given on the Bloomberg page I linked above, the Bloomberg Professional page you linked from Zerohedge.com and the figures on the Treasury Direct page are all annualized rates. The TresDirect quote shows that a $1,000.00 par note would have cost you $999.84 and on 2/18/2010 you would get $1,000.00 back. That was the price at the auction. (Important to bear in mind, for reasons that will be clear in a moment) If you rolled that out for another three consecutive notes at the same cost, your realized gain would equal .065% or sixty five hundredths of a percent. In other words, your one thousand dollar investment at that yield would gain you $.65. You read that right. Sixty five cents over a one year period.

Keep in mind that the auctions held by the Treasury and conducted by the NY Federal Reserve bank are open only to a short list of Primary Dealers. Here is the list of Primary Dealers from the NY Fed website. Note that "China" is not on the list, as many on this website seem to think the Chinese government buys it's paper directly from the Treasury. They don't. They buy it either from one of the primary dealers or any of the approved secondary dealers, which many of the rest of the major retail and institutional brokerages are.

The thing is, the quote from Bloomberg is NOT on paper purchased at auction but rather paper on the secondary market. United States Treasury securities, particularly short term notes are essentially the most liquid security in the world. They trade daily in the tens of billions of dollars amongst counterparties the world over. You can get a quote on virtually any quantity of any maturity in a matter of minutes from any major brokerage firm on the country with a bond desk. They also settle "same day" as opposed to the "trade plus three" rule that equities and most every other security, including most corporate bonds, etf's, Mutual Funds, etc. follow.

So how did a bond that had a yield of .065% at auction get bid into the negative?

Demand. T-bills, notes and bonds are affected by supply and demand as much as anything else. Demand spiked for a short time yesterday and sellers were able to get more than par for notes maturing in February. What happened is instead of that one thousand dollar note costing $999.84, it was bid to slightly higher than $1,000.00. If the yield was negative .02027821 then the 90 day note would have cost somewhere near $1,000.005. One thousand dollars and one half cent. Again, the yield is annualized, so to get the figure for a single 90 day note you have to divide the quoted yield by 4.

A million dollars at that yield would have cost right around $1,000,005.00 and in 90 days you would get one million back from the Treasury.

I have to say that is not dead nuts accurate because I don't have a bond calculator handy and the ones that come up on a Google search either will not calculate a zero coupon, premium bond properly or they require a download or cost money. I thought screw that. I know I'm real close - close enough to make the point, and the point is, we are talking real peanuts here. It is most certainly significant, don't get me wrong. It represents another "flight to quality" like we saw last Autumn. But it isn't a huge amount in real dollars. As you indicated, it does say something that varous entities are willing to pay money to store money. But, just like last Autumn, it only lasted a for a short time so the only people affected by it were those that bought that paper at that quote. If they waited till later in the day or till today, they got back into positive yield territory.

Does it portend another drop of 2000 or more points on the Dow?

Who knows.

No one does.

If the yield is negative You are paying the same amount or near the value of the bill upon maturation less current inflation is my reading of this. So if you are buying a T-bill right now and you factor in inflation to the amount you get for holding the bill to maturity your yield is negative.

Inflation doesn't enter into the calculation for yield on these securities because they are not inflation protected or "TIPS" nor are they indexed in any way to inflation. They are simply zero coupon bonds that normally sell at a discount to par and mature at par. The difference between purchase price and par is the yield and therefore your interest earned (or lost, as the case may be).

I don't have my calculator but the way the auctions typically work is the Treasury will put a T-bill at there for 990 for a 30 day and than pay the owner $1000 at the maturity date.

Not always. The price for all T-Bills (that is maturities of 52 weeks or less) changes all the time, depending on the term of the note and other factors. The 52 week note on the Treasury page had a sale price of $996.81500 If demand for them is high, the price will go up. If demand falls, the price will too.

This shows though that investors feel insecure that they are willing to take less risk for no-return.

Agreed, but the yield for the 90 day paper has been low all year. Appetite for risk is slowly creeping back in, but these securities represent the ultimate in safety. If demand for them is high, the yield will continue to stay low. It's the same reason you and I and everyone else is having a hard time finding a 12 month CD paying more than 1.5%. The is no reward these days for zero risk.

I read this as TARP failed. Correct me if I'm wrong.

I don't see this particular situation as having any relation to the Troubled Asset Relief Program. It's a run to a safe haven.

The quote I mentioned from my friend was for paper that matures on 02/14/2010.

Price = $999.89861 Annualized Yield .04056% This was at about 3:30 or so.

[AllentownJake]

46. Thank you for the explanation

I'm not a bond trader. I can take a guess that when something that is super secure has a high demand and thus less of a yield than people are not looking for investments with higher returns right now because they worry about principle security.

My point on TARP is that it was supposed to stabilize the financial institutions. If people are still concerned a year later, that means that the faith in said institutions has not been returned.

[A HERETIC I AM]

47. Well, luckily short term Treasury paper has yet to be considered..

a "troubled asset"!

Let's hope it stays that way.

[AllentownJake]

48. That wasn't my point

:-)

My point is if there is a high demand for secure assets and people are avert to risk a year later, TARP didn't have the intended consequence of restoring faith in the private financial system.

[EmeraldCityGrl]

49. Very good analysis. One question I would ask,

while not being familiar with the terminology, is, where the T-Bills bought in large lots(?) or was this a result of many smaller investors purchasing?

Not sure if there's any way to answer that question, but if so it would suggest whether another country was buying up T-Bills or if it were due to an increased
lack of faith in the banks ( or FDIC) remaining solvent.

[A HERETIC I AM]

50. Could be any number of factors and both large and small investors.

I have zero experience using a Bloomberg Professional terminal, the type that produces charts like in the OP and at the link, so I don't know if their service provides volume information on bond trades. The subscription for that service is something like $1500.00 a month.

Having said that, the last time short term Treas. paper went negative yield was, as I said above, late last year, when all hell was breaking loose. The yield on the 30 year bond bottomed out in December of 2008. Even with the panic in March of this year, I don't recall short paper going negative.

The pool of this type of paper that is out there is IMMENSE so for dramatic swings to occur it does take some serious volume to push yields around like that. Serious volume means big players, not necessarily Jane and John Q. Public. But big players means Insurance companies, Pension funds, Mutual Funds, Banks, both foreign and domestic, etc.

[DU GrovelBot]

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[Odin2005]

51. Again? OH SHIT!