T-bill terror | FT Alphaville

T-bill terror

Duh duh duh!

The yield on some short-term Treasuries, T-bills, turned negative on Thursday. That means that investors are piling into Treasuries to such an extent that they’re now willing to effectively pay the government for the benefit of owning them. The last time we saw this happening was in 2008, in the depths of the financial crisis.

There are generally two ways to look at this: a portend of imminent financial doom or symptomatic of the wider changes in the banking industry.

The former is certainly the line being pursued by the excitable Zero Hedge blog:

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…  

While the FT is suggesting another explanation in its coverage on Friday morning:

Short-term US interest rates turned negative yesterday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year . . .

The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors – a practice known as “window dressing” on Wall Street, analysts said.

Window dressing or a herald of cataclysmic financial failure? There’s a pretty big difference between the two.

John Jansen, of bond market blog Across the Curve, has some more nuanced thoughts:

I do not speak to often of the T bill market but yields in that market continue to collapse. In one recent conversation a market participant  noted that bill yields are negative out to February. There are a couple of factors at work here. There is a massive wall of liquidity, a pile of cash which needs a home. That is driving yields lower.

Typically as the year end approaches clients tend to unwind profitable trades and reduce balance sheet. I think that some of that deleveraging process has created new piles of cash and that money needs a place to park.

Others are preparing to beautify their balance sheet by having some pristine government paper on the books over year end. Some of that trade has begun as investors purchase paper which will carry them into 2010.

The cash on the sidelines idea is also a notion also picked up by Bill Gross in his latest Investment Outlook:

The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until. To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements. The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds.

. . .

So come on you frustrated Will Rogers lookalikes. Join the wimp who pulled his money out of the bank just 14 months ago. Look at your monthly statement, zero in on that .01% yield and say to yourself, “I’m as mad as hell, and I’m just not going to take this anymore!” You can’t buy the Burlington Northern – Warren Buffett has scooped that up – and most other choices offer tempting returns, but potential bullets as well. Buy some utilities. It may not be as much fun as running a railroad, but at least you’ll know who to call if the lights go out .

Minus 0.03 per cent is of course, very different to 0.01 per cent — but the basic idea still stands.

Banks and money market funds may need to get into anything other than cash — and, as noted by the FT, the traditional window-dressing effect could be magnified this year by the fact that the major investment banks are now classified as bank holding companies — giving them a December 31 year-end. Supply issues (the Fed ended issuing T-bills as part of its Supplementary Financing Program in September 2009) may also be a factor.

FT Alphaville is of course, no stranger to fiscal doom and gloom (financial comet, anyone?) but the fact that the last time T-bill rates turned negative, in December 2008, did not turn out to portend a cataclysmic event, even if it was a symptom of some risk-aversion, suggests this is more of the same.

In fact, this is what some people were saying back in December 2008:

“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

Sound familiar?

Related link:
Sympathy for the money market funds – FT Alphaville
Pimco’s first active ETF is a money-market fund alternative – WSJ
Money market funds dial up the risk – The Motley Fool