Bloomberg News

Lock In U.S. Bill Rates at Eight-Month High, LPL Financial Says

March 13, 2012

Investors should lock in Treasury bill rates that have soared to an eight-month high by purchasing the debt and holding it until maturity, according to LPL Financial.

Three-month (USGG3M) Treasury bill rates touched 0.1170 percent on Feb. 14, the highest level since June, as the government increased issuance of short-term debt before the April tax deadline and overnight money-market rates rose. The three-month bill rate was at 0.0763 percent today, up from this year’s low of zero, first touched Jan. 10. The six-month Treasury bill rate was at 0.1420 percent, almost at the 2012 high of 0.1475 percent set on Feb. 14 and up from this year’s low of 0.0254 percent, set Jan. 11.

“It makes sense for investors to try to lock in for a longer period of time the recent rise in rates,” said Anthony Valeri, a San Diego-based market strategist specializing in fixed income at LPL Financial, which oversees $330 billion, in a telephone interview. “The rise in bill yields is likely to prove temporary as the Federal Reserve isn’t preparing to raise its target rate and the supply-demand trends that supported the rise will end.”

Valeri began recommending that clients purchase bills with a focus on three- and six-month maturities in a note to clients published March 8.

“The Treasury’s use of special cash-management bills this quarter increased supply and helped push yields higher,” said Valeri in the interview.

Cash-Management Bills

The U.S. Treasury Department on Feb. 28 auctioned $20 billion in cash-management bills, which are used to help bridge short-term borrowing. Treasury debt issuance peaks from February through May as the government pays tax refunds.

Treasury bill rates have also been supported by rising repurchase agreements and overnight federal fund rates. Rates on overnight repurchase agreements, or repos, increased because of an influx of collateral as the Fed replaced $400 billion of shorter-term Treasuries in its holdings with longer-term debt under the program known as Operation Twist, due to end in June. The Fed’s 21 primary dealers held $52.60 billion of coupon debt with maturities of as much as three years as of Feb. 29, central-bank data show, compared with $1.8 billion Oct. 5.

The average rate for borrowing and lending Treasuries for one day in the repo market was 0.2 percent yesterday, according to index data provided by Depository Trust & Clearing Corp., the parent of Fixed Income Clearing Corp. That was up from minus 0.001 percent on Dec. 30.

Repo Transactions

The DTCC index is a weighted average of all general collateral repo transactions during a day. About $3.6 trillion in repo transactions is processed daily by the DTCC.

The surge in repo rates has lifted the federal funds rate further above the base of the central bank’s zero to 0.25 percent target range this year. The overnight federal funds effective rate was 0.12 percent yesterday, up from 0.04 percent at the end of last year. The effective rate is a volume-weighted average on trades by major brokers published daily by the New York Fed.

“These money-market rates are all tied together, but you will likely have Treasury bill rates come down in the months ahead while repo rates may remain elevated,” Valeri said.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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