The Back Alley Archives

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%.

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.”

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.