Two GREAT pieces of news in the T-bill market

[annarborgator]

1. The yield on a 3 month T-bill apparently went negative sometime this afternoon. So instead of being paid interest to hold US government debt, people were paying a premium for the right to hold US debt? Sweet, that doesn't sound like a bubble at all:

At some point during the afternoon, the yield on the three-month Treasury bill dipped below 0%, according to traders, as investor desire to hold short-term liquid debt trumps all else.

Year-end needs for liquidity probably play a part in this, according to one fund manager, but it’s still insane. “It’s the modern version of stuffing it into your mattress,” says Thomas di Galoma, head of trading at Jefferies & Co. “You just can’t make it up.”

A negative bill yield means investors are willing to pay to get the securities and forego the interest they’d normally receive. It comes one day after a three-month bill auction that yielded 0.005%, the lowest auctioned yield since 1941, and at a time when investors, in part because of year-end worries, are “trying to hide their money for year-end in the safest instrument known to mankind, and that’s Treasury bills,” Mr. di Galoma says.

Most of the Treasury bill curve is sporting a yield of zero, or just about. The one-month bill was lately yielding 0.025%; the six-month bill was at 0.25%, and the one-year bill sported a yield of 0.4%.

a1's link: http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-yield-goes-negative/

2. Treasury sold $30B of 4 week T-bills at a yield of 0%, with bids totaling more than 4 times the amount of debt being sold. Another sign of how inflated the treasury bubble is right now?

Dec. 9 (Bloomberg) -- The Treasury sold $30 billion of four-week bills at zero percent for the first time since it began selling the securities in 2001 amid persistent demand for the safety of U.S. debt during the worst financial crisis since the Great Depression.

The bills were sold at a high discount rate of zero percent, the Treasury Department said today in Washington. The government received bids for the bills totaling more than four times the amount sold.

“It’s the year-end factor with those four-week bills,” 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.”

a1's link: http://www.bloomberg.com/apps/news?pid=20601087&sid=adLrsq9KMJL8

So anyone have thoughts about what happens when this bubble pops?

[radbag]

well - any sign of curve flattening would indicate to me that smart money has either of the following :

a) an alternative to for short dated investing
b) confidence that the financial sector is bouncing of the lows.



the curve i'm referring to is the data points connected on yields ranging from 1mo treasury bills all the way out to 30 yr treasury bonds....a positive yield curve is one in which yields increase the further out you go on the maturity spectrum

[annarborgator]

Yes...what I'm wondering about more is what happens to our government when the Tbill bubble collapses....won't we lose the ability to effectively export our debt? Won't the Fed likely have to start making massive purchases of Tbills? Seems like that would be pretty inflationary...maybe I'm misunderstanding.

[annarborgator]

One corner of the credit markets is the repurchase markets, known as "repo," where banks and securities firms make and receive short-term loans backed by collateral, usually Treasury bills.

When those T-bills are yielding nothing, there's little incentive to deliver them on time. If the holder loses the interest, it's no big deal.

http://news.yahoo.com/s/ap/20081209/ap_on_bi_ge/meltdown_treasurys;_ylt=ApMWYyJZ1N8VuxzvvR8IHo.s0NUE

Explains why Tbill fails have been steadily increasing.

[radbag]

yeah but the repo market has been ineffective the last year or so and i'd venture to say it's been inefficient the last 2 years....the yield (or lack of) in the tbill market imo, hasn't helped...the repo market is a market primarily used by banks to maintain appropriate levels of cash/assets as determined by bank regulatory agencies...anything in excess of those minimum held levels can be lent out (and repurchased back)....usually at levels that are profitable and worth while and usually with entities who are credit worthy (preservation of capital)

so there's a hoarding of cash going on...no one wants to loan it out to help another firm...regardless of compensation....repo market has been dysfunctional for a while now...and not because of where tbills are trading.

[a1bion]

At least we know what the banks have been doing with all that yummy TARP money ol' Hank Paulson has been giving them. LOL

Seems to me we could've just bought Treasuries from ourselves and cut out the middle man.