Thursday, November 19, 2009

On Negative T Bills

by Bill McBride on 11/19/2009 09:30:00 PM

There was some buzz earlier today about short term T bill rates turning slightly negative. This happened last year too, but for different reasons ...

From the Financial Times: Short-term US interest rates turn negative

Short-term US interest rates turned negative on Thursday as banks frantically stockpiled government securities in order to polish their balance sheets for the end of the year.
...
The scramble has been exacerbated by the fact that all leading US banks ... will this year close their books at the same time – at the end of December.
excerpted with permission
John Jansen at Across the Curve explains:
I do not speak to[o] 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.
And more from John: More on Negative T Bills
In my closing post I noted that T bill rates are in negative territory and gave some reasons for that. Here is an excerpt from David Ader of CRT on that same topic;

“We instead take our cue from activity in the financing markets, where year end is playing its hand – Jan bills are trading negative. The story here is not a new one as we saw bills negative at the end of the last quarter, but exacerbated by a more intense year end. We say that because 1) it’s clearly the talking point on funding desks, 2) EVERYONE has a Dec 31 year end as we have no investment banks any longer, and 3) as bank holding companies there’s a likelihood that former IBs, too, need to show cash in something other than a mattress.”

Another analyst whom I read suggested that an exacerbating factor was the maturity of some cash management bills which were not replaced.

Whatever the case, I am certain that the present circumstance is not an indicator of financial stress as plunging bill rates have been in the past.
No worries ...