Negative Bill Auction Yields Would Avoid ‘Grab-a-Thon,’ CRT Says

Letting investors buy short-term bills with negative yields at auction would make the market more efficient, according to CRT Capital Group LLC.

The Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association unanimously recommended that the government allow for its auctions of bills to price at negative yields “as soon as logistically practical,” according to the group’s report yesterday to Treasury Secretary Timothy F. Geithner, released today.

Investors bid a record 9.07 times the $30 billion in four-week bills sold by the Treasury Department on Dec. 20 at zero yield in one of 12 auctions since the beginning of September at which investors paid the full face value to own the shortest-maturity U.S. government debt. The average ratio of bids to debt sold, known as the bid-to-cover ratio, was 6.01 at the past 10 offerings, with the yield averaging 0.011 percent.

“Negative yields is not a new concept to the Treasury market,” David Ader, head of U.S. government bond strategy at CRT in Stamford, Connecticut, said in a telephone interview. “They’re saying do it effectively and efficiently as opposed to having a grab-a-thon and a hoarded auction.”

Three-month bills were sold at a record low yield of 0.005 percent on Dec. 19, Dec. 5 and Nov. 7, while an auction of six-month bills on Sept. 19 produced a record low yield of 0.03 percent. Bill yields traded as low as negative 0.09 percent for four-week securities and negative 0.04 percent for three-month bills, both in December 2008. In August, the yield on each declined to negative 0.03 percent.

Negative TIPS Yield

The government sold $15 billion of 10-year Treasury Inflation Protected Securities at a negative yield for the first time in January. Holders of that debt may earn positive returns if inflation exceeds the premium paid above the face value of the securities. Buyers of bills get only the repayment of the security at face value, regardless of the price at which the securities are sold.

The negative yields reflect investor willingness to pay to use the government as a “safe deposit box” that will ensure the return of principal, according to Ader.

“This is recognizing something that the private sector has already initiated” by banks including Bank of New York Mellon Corp., which has charged depositors to hold funds, Ader said.

The 13-member committee, which includes representatives from five primary dealer firms as well as investment companies including BlackRock Inc. and Pacific Investment Management Co., said “that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function.”

“You have to adapt to where you are,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade directly with the Federal Reserve. “It does liberate those that are participating in the auction not to be constrained by the negative rate.”

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