Treasury Bill Market Rocked as Debt Debate Punishes Savers

  • Negative yields emerge as Treasury cuts bill auctions
  • Money-market returns may remain miniscule long after Fed hikes

Long-suffering savers can’t just blame the Federal Reserve anymore.

For more than six years, rock-bottom U.S. interest rates have made it virtually impossible for depositors and investors in money-market funds to keep up with the cost of living. But now, with the central bank poised to move for the first time in a decade, savers counting on higher rates to lift returns are facing yet another obstacle: America’s debt ceiling.

Limits on how much the U.S. can borrow have forced the Treasury Department to sell less of its shortest-term debt, exacerbating a shortfall that’s caused yields to turn negative and squeezed money-market funds that buy the securities. And while a last-minute maneuver by House Speaker John Boehner may have staved off a shutdown this week, the threat of another debt showdown occurring by early December still looms.

Supply Deficit

All that comes as Pacific Investment Management Co. says regulators’ moves to wring out risk in the financial system may add a trillion dollars of demand to T-bills and other high-quality assets in the coming year -- and depress short-term yields even further.

“I don’t think we should expect retail savings accounts really to change much in terms of enhancing their yields for small savers for some period of time yet,” said Christopher Sullivan, who oversees $2.3 billion as the New York-based chief investment officer at United Nations Federal Credit Union.

That has consequences for the 76 million baby boomers nearing retirement, who may be deprived of much-needed income even after the Fed ends its near-zero rate policy, which it has maintained since 2008.

Average yields for the biggest money-market funds, which buy a sizable chunk of the ultra-safe securities, haven’t topped 0.1 percent since 2010, according to Crane Data LLC. Before 2008, they were closer to 5 percent.

Treasury bill rates out to three months have turned negative in recent weeks, meaning buyers now will lose money if they hold them to maturity. Those on four-week bills fell to minus 0.0456 percent on Sept. 18, a level not seen since the depths of the financial crisis. The yield was minus 0.0305 percent Monday as of 9:20 a.m. in New York.

‘Extraordinary Measures’

Even though short-term U.S. debt yields next to nothing, demand has only increased as supply hovers at multi-decade lows. Since March, after the debt-ceiling suspension expired, the Treasury has been using “extraordinary measures” to fund U.S. government spending.

Faced with the prospect those measures will be exhausted in December, the Treasury will cut bill supply by $135 billion between now and then to stay below its statutory borrowing limit of $18.1 trillion, according to estimates by Citigroup Inc.

The Treasury indicated this year that it wanted to boost bill supply to meet burgeoning demand, but has instead put aside that plan as the debt-limit issue remains unresolved.

“Their hands are tied by the debt ceiling now,” said Andrew Hollenhorst, a fixed-income strategist at Citigroup.

Last week, the Treasury surprised the market by cutting its sale of four-week bills to $15 billion -- $5 billion less than its Sept. 15 auction and down from $45 billion in July. Record demand at the sale brought down the interest rate on securities to zero.

On average, Treasury bills yielded 0.03 percent on Friday, according to index data compiled by Bank of America Corp.

The U.S. finds itself in yet another funding predicament two years after Republicans shut down the government for 16 days in an unsuccessful attempt to defund Obamacare and pushed the country to the brink of default.

Partisan Squabbles

This time, some Republicans threatened to block any spending bill unless it stripped federal funding for Planned Parenthood, the women’s reproductive health organization. The issue has proved to be so contentious within the Republican Party that it prompted Boehner to announce he would resign from Congress at the end of October.

Boehner is now be free to ignore the demands of conservatives in his party and schedule a quick vote to avoid a shutdown this week, although it only shifts the risk to December, when the temporary funding will expire.

“If the debt ceiling increase gets delayed because of the politics of this situation, bill yields will stay lower longer,” said Joseph Abate, a money-market strategist in New York at Barclays Plc, one of the 22 dealers that are required to bid at Treasury auctions.

Debt Ceiling
Debt Ceiling

Aside from the political brinkmanship, which has the potential to create turbulence in the bill market in coming days and weeks, rules intended to prevent a repeat of the credit crisis may ensure that returns for savers will remain paltry regardless of what happens in Congress.

Higher capital requirements have led some banks to add fees on deposits, pushing savers into short-term government securities. Rule changes in the $2.6 trillion money-market fund industry that start in 2016 have prompted providers like Federated Investors Inc. to convert funds that can buy higher-yielding assets to those that invest only in government debt.

“This insatiable demand means short-term yields on many assets, including bills, will continue to be suppressed,” said Jerome Schneider, the head of short-term strategies at Pimco, which oversees $1.52 trillion.

Extra Demand

Pimco estimates $1 trillion of extra demand for high-quality liquid assets in the coming year as a result, which may put a squeeze on the $1.4 trillion bill market.

Ian Lyngen, a government-bond strategist at CRT Capital Group LLC, says the worst may be over for savers who were crushed by the Fed’s stimulus measures.

“We’re finally getting toward the end of the Fed’s extraordinarily accommodative monetary policy,” he said. “As that translates to the saver, it should be a benefit or a pickup in the rate on those deposits.”

It will still take time before savers even start to notice, according to Joe Lynagh, the head of money markets and short cash funds at T. Rowe Price Group Inc., which manages $773 billion.

Futures traders see the odds of rates rising before January at little more than a coin flip. And once the Fed does start, savers may have to wait about two years before the benchmark rate reaches 1 percent.

“The individual depositor or money fund investor is really not going to feel the full effects for a while,” Lynagh said. “And Treasury bill rates are going to be below the Fed’s target range when they begin to lift rates, and that will be another penalty to savers right there.”

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