This is what a real T-bill crisis looks like. Just so we’re clear.
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The markets have spoken and they are ambivalent: fine, you want to shut the government down, see if we care.
Nomura’s Jens Nordvig finds that stocks are up a bit, emerging market currencies doing well and bond yields slightly higher. However, there was movement on Tuesday that suggested the first nervous rearranging of assumptions around a US default.
In the sound and fury of eurozone sovereign debt activity on Tuesday, we forgot to take note of Belgium’s auction of short-term T-bills.
It was not good. Read more
The search for a safe haven just got even trickier. BNY Mellon announced on Thursday that it is to charge a fee on all those cash deposits piling in as investors flee risk assets. Presenting, then, the latest cash killers — flashes courtesy of Reuters:
Thursday, August 04, 2011 10:54:35 AM RTRS – BNY MELLON SAYS TO CHARGE FEE ON “EXTRAORDINARY” DEPOSITS; TRADERS CITE THIS FOR US T-BILL DEMAND BK.N Read more
Morgan Stanley’s US interest rate strategists have included a lovely set of charts in their latest research note that portray the moves in short-term markets due to the debt ceiling impasse. The strategists stress that the price moves don’t reflect liquidity shortages but are “the functional equivalent of a tightening, which is exactly what the economy does not need now.”
Quite. Click to expand the gory details. Read more
US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance, the FT reports. The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25 per cent in December 2008. The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate. The Investment Companies Institute calculates that last year the industry waived $4.5bn of fees to maintain the fixed $1 per share net asset value of funds. See also FT Alphaville posts.
If you’re a money market fund manager, you’ll already be aware (plus possibly extremely concerned about) that general collateral rates are approaching zero. If you’re not, then read on.
As a reminder, the introduction of a new fee on banks in April by the US Federal Deposit Insurance Corporation sparked a slump in the government repo market, knocking that general collateral rate. Read more
Interest rates demanded by investors to hold short-term Treasury bills sank to record lows on Tuesday and were approaching zero, amid the prospect of lower sales by the US Treasury in coming months, the FT reports. The Treasury announced late on Monday a sharp reduction in borrowing needs for the second quarter due to higher tax receipts and less spending outlays. The issuance of Treasury bills is now pegged at $142bn versus an original estimate of $298bn. The Wall Street Journal says UST bulls risk corralling themselves by pushing prices higher in anticipation of smaller auctions. The Treasury is scheduled to release sizes for next week’s auctions in three-year, 10-year and 30-year bonds later on Wednesday.
Tip of the hat to Alea for this — an unusually interesting record of minutes for the latest meeting of the Treasury Borrowing Advisory Committee, released in tandem with the Quarterly Refunding Statement.
The Greek Treasury knew better than to fly too close to the sun.
Tuesday’s rollover of T-bills by the Hellenic Republic went pretty well, in and of itself. Read more
“Greece will go to the markets mid-July, issuing T-bills of three, six and twelve months,” Deputy Finance Minister Philippos Sachinidis told Reuters. Greek officials have previously said the country may go ahead with a T-bill auction in July but Sachinidis’ comments confirmed those plans.
Got a spare 5bn yuan, asks FT Alphaville? If you do you can buy the rest of China’s Friday T-bill auctions because . . . no one else wanted them. That means China failed to find enough buyers for the whole of the two auctions. For, according to some anonymous traders, the country’s finance ministry had planned on selling CNY 20bn worth of the 273-day bills and CNY15bn of the 91-day bills. Read more
As noted, the flight to safety is taking on epic proportions. With that in mind our thoughts are going to what may happen next, or specifically, the implications of a Treasuries bubble. Here’s one view from Monument Securities (our emphasis):
Though a Treasuries bubble might appear unproblematic, however, its bursting could turn out to be more dangerous than the collapse of any other kind of bubble. If confidence eventually returned to other markets, investors would shun the low yields on Treasuries. The Fed would then face the choice of monetising most or all of the Treasuries market, as funds fled to higher-return investments, or else of allowing Treasuries yields to race higher. Because foreign holdings represent a significant proportion of the stock of Treasuries outstanding, a collapse in Treasuries prices might soon be reflected in a collapse of the US dollar, with the accompanying threat of hyper-inflation in the USA and depression elsewhere. At that point, many investors might wish they still enjoyed the comparative calm of the ‘credit crunch’.
The Wall Street Journal reports Wednesday that the Fed is considering issuing its own debt for the first time. Why? Wee, because it would give the central bank additional flexibility as it tries to stabilise rocky financial markets, of course. The paper explains
Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter. It isn’t known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn’t explicitly permit the Fed to issue notes beyond currency. Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.
At the core of the deliberations is the Fed’s balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc. The ballooning balance sheet is presenting complications for the Fed. In the early stages of the crisis, officials funded their programs by drawing down on holdings of Treasury bonds, using the proceeds to finance new programs. Officials don’t want that stockpile to get too low. It now is about $476 billion, with some of that amount already tied up in other programs. The Fed also has turned to the Treasury Department for cash. Treasury has issued debt, leaving the proceeds on deposit with the Fed for the central bank to use as it chose.