Lost Deposit Guarantee May Reduce T-Bill Rates: Chart of the Day

Dec. 20 (Bloomberg) -- Treasury-bill rates are poised to decline as an expanded guarantee ends for some bank deposits, according to Pavilion Global Markets Ltd. strategists.

The Transaction Account Guarantee Program, or TAG, enables U.S. banks to provide unlimited insurance on deposits that don’t pay interest. The program, which began in the fourth quarter of 2008, is scheduled to lapse at year-end. The limit will revert to $250,000 for each account.

As the CHART OF THE DAY shows, the amount of money held in these non-interest-bearing accounts has jumped 71 percent since the ceiling was removed, according to Federal Deposit Insurance Corp. data. Money-market fund assets dropped 30 percent during the period, according to the Investment Company Institute.

“TAG facilitated the exodus from money-market funds and into other safe assets,” Pierre Lapointe, Pavilion’s head of global strategy and research, and two colleagues wrote in a report two days ago.

A reversal may have already begun. Money-fund assets have risen 2.7 percent this quarter to $2.65 trillion, according to the institute’s data. The increase would be the biggest for a full quarter in four years.

Losing the unlimited deposit guarantee “will lead institutions to reassess the safety” of the accounts and move some money into Treasury bills, the Montreal-based strategists wrote. They expect the shift to push interest rates lower.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net