Lost amid concern that the U.S. is headed toward a default is a fact that bulls say may help underpin American debt prices: supply of the shortest-term securities is shrinking.
Treasury bills make up 13.2 percent of the $11.6 trillion in marketable debt outstanding, the smallest share since Dwight Eisenhower was president in the 1950s and down from 34.4 percent in 2008, according to Barclays Plc. The drop reflects efforts by the government to take advantage of record-low interest rates by selling more longer-term debt after the financial crisis, pushing the average maturity of the Treasury’s debt to 5.4 years from 4.1 years in early 2009.
The reduced supply of high-quality, short-term debt combined with rising speculation that the government shutdown will curb economic growth and lead the Federal Reserve to keep up unprecedented stimulus may only enhance the appeal of the securities once the specter of default passes. Rates on one-month bills jumped to 0.34 percent last week, from as low as 0.01 percent at the start of the month.
The selloff “begets opportunistic buying on the part of Pimco,” Bill Gross, the co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., said in an Oct. 9 Bloomberg Television interview. “We’re picking up pennies on the street. This is a particular penny that we think is risk-free,” said Gross, whose company manages $1.97 trillion, including the world’s biggest bond fund.
Bills, which have maturities of one year or less and are considered a cash equivalent by investors, are increasingly needed by banks and money funds as new regulations related to the U.S. Dodd-Frank Act and rules from the Basel, Switzerland-based Bank for International Settlements require banks to hold more capital that is considered safe.
Even with the U.S. in jeopardy of defaulting and facing a possible downgrade, that demand wouldn’t likely weaken, according to fixed-income strategists at New York-based JPMorgan Chase & Co., the largest U.S. bank by assets.
“Most holders of Treasuries are not ratings-driven, and this is certainly the case for the largest holders such as central banks and commercial banks,” JPMorgan strategists led by Alex Roever in New York, said in an Oct. 10 report to clients.
U.S. Senate Democratic and Republican leaders said late yesterday in Washington they were optimistic about ending a partial government shutdown and preventing the nation from breaching the debt ceiling on Oct. 17. The debt limit, now $16.7 trillion, has been raised 78 times since 1960, according to the Treasury department.
A deal under discussion would suspend the debt limit through Feb. 15, 2014, fund the government through Jan. 15, 2014, and require a House-Senate conference on budget matters by Dec. 15, according to a Senate source familiar with the talks, who spoke on condition of anonymity to discuss them.
“We are not really taking in consideration of default,” Deborah Cunningham, the head of money-market funds at Pittsburgh-based Federated Investors Inc., the third-biggest U.S. money fund manager, said in a telephone interview Oct. 10. “We would love to not always have to be pushed in the discussion to the 11th hour. I’m not surprised by it, but in the end I’m not real worried about it either.”
Bond markets in the U.S. were closed yesterday for the Columbus Day holiday. One-month Treasury bill rates surged to 0.3397 percent on Oct. 8, the highest since October 2008, before ending the week at 0.2484 percent amid speculation a compromise would be found to allow at least a temporary lifting of the debt ceiling. The rate was at 0.2434 as of 7:01 a.m. in New York.
Treasury 10-year note yields climbed three basis points today to 2.72 percent.
The 10-year yield, used to help set interest rates for everything from car loans to mortgages, remains below its 2013 closing high of 2.99 percent reached Sept. 5, before the Fed announced on Sept. 18 it would maintain its $85 billion a month of bond buying to stimulate the economy.
Treasury officials ramped up sales of bills after the collapse of Lehman Brothers Holdings Inc. in 2008 to inject cash into the financial system amid rising demand for the safest of assets. Bills, which made up 21.3 percent of government debt at the end of fiscal 2006, jumped to 34.4 percent in 2008.
As the crisis eased, the Treasury switched to selling more longer-term debt to lock in record-low rates. The average maturity of U.S. debt was 64.5 months in March, up from a 24-year low of 49.4 months in 2009.
The percentage of bills outstanding will fall to 12.4 percent in 2014 and 8.1 percent in 2023, according to projections from the Treasury Department presented before its most recent quarterly debt auction.
In the 1950s, yields on 10-year notes fell as low as 2.29 percent, monthly data collected by the Fed show, as unemployment reached a nine-year high of 7.5 percent during the Eisenhower administration and the U.S. paid for postwar reconstruction and the beginnings of the space program.
The 1950s were “a period of normalization of interest rates, after the Treasury and the Fed basically had pegged rates up until 1951, suppressing them for 13 to 14 years to reduce the cost of Treasury financing during the Great Depression,” Jack Malvey, the chief global-markets strategist at Bank of New York Mellon Corp., said in a telephone interview on Oct. 11. The firm manages $1.3 trillion.
About $417 billion in short-term debt comes due between Oct. 17 and Nov. 7. That includes $120 billion of bills maturing on Oct. 17, according to data compiled by Bloomberg. An additional $93 billion of bills are due on Oct. 24. On the last day of the month, $150 billion needs to be paid back, including two-year and five-year notes that have matured.
BlackRock Inc., the world’s largest asset manager, followed Fidelity Investments and JPMorgan Chase on Oct. 11 in declaring its money funds free of the bills that would be most affected by a default. Investors pulled $28.7 billion from U.S. money funds in the seven days ended Friday, according to the research firm Crane Data LLC in Westborough, Massachusetts.
Fahad Almubarak, the chief of Saudi Arabia’s central bank, told reporters at a news conference on Oct. 11 after a speech in Washington that “the U.S. current crisis will go away, and we think its effect won’t be lasting on our investments.”
“The dollar is the reserve currency of the world and Treasuries are the reserve asset of the world, despite the fact that it is the U.S. going through this political and monetary upheaval,” Simon Ballard, a senior credit strategist at National Australia Bank Ltd. in London, said in a telephone interview on Oct. 2.
International Monetary Fund economists said a U.S. default might “seriously” harm global activity, and cut forecasts for this year and next to 2.9 percent and 3.6 percent, from the 3.1 percent and 3.8 percent estimated in July.
That may push more money into bills and bonds. JPMorgan’s weekly Treasury investor sentiment index rose to 10 on Oct. 7, from negative 9 in the month-earlier survey and as low this year as negative 23 on May 27. The gauge, which reached a high of 34 in October 2010, subtracts the percentage of investors expecting prices to fall from those expecting a rise.
“If we slide past the 17th without an agreement to increase the debt limit, it will be bad for the economy for sure, but it won’t mean a default,” Jim Bianco, president of Bianco Research LLC in Chicago, said by telephone on Oct. 13. “That would set up the most bullish scenario you can imagine for Treasuries, which would be that the economy is collapsing and the Fed is likely throwing even more money at it.”
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