Treasury four-week bills traded at negative rates for the first time since January amid speculation the expiration this month of unlimited deposit insurance for certain bank accounts will push cash into money markets.
A procedural motion yesterday fell 10 votes short of the 60 needed in the U.S. Senate to move forward on a two-year extension of the Transaction Account Guarantee Program. The TAG program, introduced in the wake of the 2008 credit crisis, guarantees $1.5 trillion in non-interest bearing transaction accounts above the FDIC’s general limit of $250,000. A previous extension is set to end Dec. 31.
The one-month rate on the bill reached negative 0.0051 percent, from 0.0203 percent yesterday, according to Bloomberg Bond Trader prices.
The rate is down from a high this year of 0.1876 percent on Nov. 23. The one-month bills last traded negative, meaning investors are paying the government for the safety of holding their cash, on Jan. 9, according to Bloomberg data.
“This week’s decline in bill rates was dramatic,” wrote Tony Crescenzi, a strategist at Pacific Investment Management Co. in Newport Beach, California, in a note to clients today. “The expiration of the TAG program is a lesser-known cliff and it will result in a further decrease in the universe of safe assets.”
The end of the insurance coverage may trigger up to $250 billion to flow out of banks accounts and into money-market securities, according to Citigroup Inc. Rates on repurchase agreements as well as federal funds are also forecast to decline, also driving bill rates lower, next year as short-term debt sales by the Federal Reserve end.
Fed policy makers announced this week that it will end their program to extend the maturity of its debt, known as Operation Twist. The debt sales, which caused primary dealers’ holdings of short-term securities to rise to record levels, has increased money-market rates, including repo and fed funds.
The slide in money-market rates this week has also been exacerbated as banks and securities firms are also often attracted to the safest maturities at quarter- and year-end to improve the quality of assets on their balance sheets.