Posted by: Aaron Pressman on December 9, 2008
The U.S. Treasury completed a remarkable auction of four-week Treasury bills today. No surprise that there was a ton of demand for the only investment still viewed as a safe haven — there were bids worth $120 billion for the $30 billion of bills being sold. But how low did bidders go on the yield they’d accept to own the bills? All the way down to zero. That’s right, the U.S. government just borrowed $30 billion at a cost of zero percent interest. That follows yesterday’s auction of 3-month T-bills at the microscopic rate of 0.005%, the lowest since the long-running 3-month maturity first hit the market in 1929.
According to a Bloomberg report on the bond market today, the 3-month bills are now trading at a negative yield, meaning buyers get a guaranteed loss, albeit a small one. One trader cited by Bloomberg noted that companies are eager, even desperate, to show they hold only ultra-safe T-bills on their balance sheets for fourth quarter earnings reports so they’re willing to accept the negative or zero yields.
That’s an awfully high price to pay for sleeping soundly at night, but if you have more money than can be easily kept under bank insurance deposit limits, there aren’t many alternatives. And it implies that investors are so worried about the safety and possible decline in value of most investments that they’re willing to lend merely on the assurance of getting their principal back intact. While some analysts fear runaway inflation from all the government bailouts and borrowing, the T-bill market at least is giving a pretty clear signal that’s not what is on big investors’ minds. They’re worried about the opposite, widespread deflation from the ongoing credit crisis, like the falling prices that occurred during the Great Depression.
UPDATE: Perhaps not surprisingly, economist Nouriel Roubini, who has been arguing for a coming wave of painful deflation, has jumped all over the latest T-bill results. He says the situation is developing into a “liquidity trap.” Because investors get paid no more to hold bonds than cash, they become further reluctant to lend. That makes it harder for the government to stimulate the economy through fiscal policy (such as lower interest rates), he says:
The consequence of falling prices (i.e. the prime reason why nominal interest rates should be that low) is that the real value of nominal liabilities will rise as do real interest rates once the nominal interest rate hits the zero bound. The incentive towards hoarding cash and saving instead of investing is thus self-reinforcing as the deflationary spiral takes hold. Any increase in money supply (like quantitative easing) goes into servicing higher real debt levels—> breaking a deflationary spiral therefore requires fiscal stimulus or balance sheet restructuring or both.
The web post has a bunch of useful links for background on the subject, as well.
There’s also a downside for the little guy when T-bill rates get this low. A handful of fund firms like JP Morgan and Evergreen have even closed their money market funds to new investors because if the funds got more deposits they’d have to buy more T-bills in the current tight market. That would depress the funds’ yields for everybody already invested. It’s an unheard and almost unimaginable situation.