Treasuries turn negative. From ZeroHedge:
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…
I wouldn’t know a Treasury trading strategy if it bit me so I’m just tossing this out here – maybe it’s great news, for reasons I couldn’t possibly understand. It just seems on its face to be a sign of …trouble.
Generally, fixed income mkts reveal what economy is doing and is likely to do much more accurately than equity mkts
And the bond “vigilantes” (whether big hedgies or China/Japan) can push back on absurd fiscal/monetary policies by changing their bond (and commodities/equities) bets
Def watch bond mkts closely….
Somehow I knew You would have the answer!
I think there is a much more likely reason than impending Doom. Hedge Funds are winding down and getting ready for the end of the year.
Those funds who have had good years are getting ready to pay out large cash bonuses.
Those funds who have had bad years are getting ready to pay out redemptions. Even some of the funds who had had good years are paying out redemptions since they have raised Gates that had been lowered last year.
So all of these hedge funds have large amount of cash and need some place safe to park in for the next two or three months. After Lehman’s bankruptcy and that forcing Putnam Prime’s money market funds to be worth less than a buck they can’t risk the money being in anything but US paper.
They don’t care that the yield is negative, they are looking for security not returns.
Additionally, all banks now have a 12/31 year end, since no IB’s exisit anymore. Balance sheets need to show some shiny treasuries as the books close on 2009. Nothing more sinister (yet).
Hold on there pardner, let’s get some perspective on the situation. Consider this my contribution to the education of the FWIW community.
First, appreciate that the ZH crowd are alarmists and usually spin every observation in the worst way possible. I have been reading “Durden” and Company since the beginning so I am a fan, but also know that they will find the darkest meaning in anything. That’s not to say that they are wrong, just a bit alarmist at times like this.
Second, let’s review TBill basics. Bills are discount securities which means an investor pays a discount to the par (maturity) value and the US Treasury pays the investor par value at maturity. For example, you buy a $1,000,000 par amount bill to $999,500 and get back at even million at maturity. The difference between what you pay and the maturity payoff is your interest. In trading, this discount is used as the quoted price convention so the bill above would be quoted at a discount of 0.05 or a percentage of par of 99.50 . The lower the discount, the higher that price and the lower the yield to maturity. Also, the closer a Bill is to maturity, the greater the sensitivity of price (discount) and interest (yield), and vice versa.
Third, the ZH writer misstates reality as the US Treasury is NOT actually putting investors in a position where investors are “paying the Government to hold their money for them”. What is happening is that heightened demand for Bills is pushing up their price as traders who own demand ever higher prices (and lower yields) to sell them to desperate buyers. There is a point (like now) where this increasing demand gets a bit ridiculous. Thus, the negative yields represent the pricing in the dealer market, not directly from the UST. What this means is that a desperate investor is willing to pay more than par value to get back par value at maturity in January. So, they pay $1,000,300 to get back an even million in six weeks. Why, because these investors HAVE to own TBills (more on that in a minute).
Fourth, every year, we get into the “window dressing” period in November and December. During this time, investors and corporations are sprucing up their balance sheets for their December 31 reporting dates. Out goes all the riskier investments held all year in favor of better stuff to show their Board, investors and the analysts. This happens every year and it results in heightened demand for the safest securities and funds that buy safe securities. It is my professional opinion that this might be the Mother of All Window Dressing periods.
Fifth, since the credit crisis began, demand for money market funds that invest in nothing but TBills has exploded. These funds can not buy repo so must buy short maturity Bills, irrespective of price or yield. These funds were the biggest buyers of Bills last December and helped push short maturity Bill rates to negative yields from early December through early January. The same thing is happening this year.
Sixth, the Treasury, over the past month, have not issued new Bills to replace maturing Bills issued last November under a special financing facility that dealt with the madness. That’s $185 billion of Bills disappearing from the market.
So, the dealers and other investors who bought Bills maturing in January at discounts are now selling them to desperate investors who HAVE to own Bills, no matter the price .
Is this a sign of great investor demand chasing a dwindling supply of the safest, short-maturity paper? Yes.
Is this a sign of a soon-to-arrive Apocalypse. Not necessarily.
Train is pulling in to Cos Cob. I hope this helps.
Fly, nice cliff notes on T-bills 102, thanks for the refresher!
Here’s an article from Barron’s that’s relative: (I’ll post the whole thing, as you have to be a subscriber)
Treasury Yield Plunge Sends Warning
By RANDALL W. FORSYTH | MORE ARTICLES BY AUTHOR
Collapse in note yields suggests economic distress will keep Fed on hold well into 2010 or beyond.
IT’S THE CRASH YOU DIDN’T HEAR. Not in the price of any security market, but in short-term U.S. Treasury yields.
Treasury bills once again were trading at negative interest rates Thursday, a mind-boggling state of affairs that hasn’t existed since the panic late last year. That followed the collapse of Lehman Brothers and the assorted knock-on effects, notably the run on money-market funds after the Reserve Fund “broke the buck.”
More significantly, the yield on the two-year Treasury note — the most actively traded security on the planet — fell to 0.669% Thursday, within a hair of the low of 0.657% set in the dark days of last December, according to data on Barrons.comcom’s Market Data Center.
But now, the economy is supposed to be well on the way to recovery, in contrast to late last year when it seemed we stood on the precipice of a second Great Depression. The Dow is back above 10,000 and bulls claim all’s right with the world. Why, then, would any rational investor be willing to lock up money for two years for the paltry return of less than two-thirds of 1%?
Wacky things have happened before in the T-Bill market. Over the turn of the year from 2008 to 2009, investors were so skittish about where they stashed their cash that they effectively paid Uncle Sam to hold it, resulting in negative yields on T-bills. Other times have seen odd happenings in the T-bill market, usually during times of stress when investors wanted only the safest assets.
Unlike T-bills, which have only weeks to run until maturity, the two-year note embodies market expectations for interest rates. Longer-term yields are simply the sum of successive short-terms; all else being equal, you should earn the same from two consecutive one-year notes as a two-year note. Nobody knows what the future holds, of course, so what the second year will yield is just a guess.
What a two-year yield of 0.70% (where the note ended Thursday) means is that the market believes short-term rates won’t rise much for a long time. The 12-month Treasury rate is just 0.25%, so the market implicitly expects the 12-month rate a year hence would be 1.15%, all else being equal. (The sum of 0.25% and 1.15% averages out to 0.70% over two years.)
Considering that the two-year note yield was 1.40%, exactly twice as high in early June, that’s a big comedown in expectations. And it’s down sharply — by nearly a third — from just a month ago, when it was around 1%.
What’s incongruous is the confluence of miniscule short-term Treasury yields with the stock market sitting at its highest perch in the past 13-plus months. If the recovery and the bull market are for real, who would settle for such niggardly note yields? Especially if the Treasury is about to auction another $118 billion of notes next week?
Part of the reason relates to diminishing expectations of the Federal Reserve to raise interest rates any time soon. In a speech Wednesday, St. Louis Fed President James Bullard pointed out that the federal-funds rate target typically isn’t raised for 2 ½-to-three years after the end of a recession.
Bullard added that the slowness with which the Fed raised rates in recent cycles — which helped inflate the housing bubble last time — will weigh heavily on the Fed’s deliberations this time around. And, as head of the monetarist-oriented St. Louis Fed, he emphasized that the central bank may rein in the expansion of the central bank’s balance sheet as a first step in removing accommodation. Increasing the fed-funds rate may come later.
The bond market heard mainly the last part of the message, and is pricing in a continuation of the current 0-0.25% fed-funds target—if not all the way to 2012, as Bullard’s observation about Fed behavior suggested—but well into the second half of 2010. As recently as early November, the fed-funds futures market had priced in a rate hike as soon as next July.
But look no further than the latest mortgage data for a clue about what the Fed is apt to do. One in 10 mortgage borrowers is at least one payment behind schedule in the third quarter, according to the latest numbers released Thursday by the Mortgage Bankers Association. Add in the nearly 4.5% of mortgage borrowers who are actually in foreclosure and you find that one in seven American homeowners with mortgages is in serious trouble.
Given this level of debt distress, the likelihood of the Fed raising rates dwindles to insignificance until well into 2010 and perhaps beyond.
And this may be like the proverbial butterfly flapping its wings on the other side of the globe, but the opposition Labour Party in New Zealand this week withdrew its support for its central bank’s policy of targeting inflation as its touchstone.
The significance of that is the Reserve Bank of New Zealand was the first central bank to adopt inflation targeting back in the 1980s. That was a part of the tiny nation’s free-market reforms championed by Finance Minister Roger Douglas that came to be called “Rogernomics,” which outdid Reaganomics in the States.
One academic became an enthusiast of the Kiwis’ inflation targeting — Ben Bernanke. Other central banks followed the New Zealanders, if not as formally, then in practice.
The tide is turning against inflation targeting now that inflation is nil or negative in many countries. Kiwi Labour leader Phil Goff called for a “competitive” exchange rate for the New Zealand dollar, which has surged 23% against the U.S. dollar in the past six months, Bloomberg News reported, which is anathema to an export-dependent economy.
In a less dramatic fashion, this is an updated version of William Jennings Bryan’s famous “cross of gold” speech in 1896. During deflations, there is no political will to pursue zero-inflation policies.
In similar fashion, that means the Fed will likely maintain a rock-bottom fed-funds target as long as the debt deflation exemplified by mortgage delinquencies foreclosures persists. That’s the message of the two-year Treasury note. And it isn’t a bullish one.