Treasury's Smallest-Ever Four-Week Bill Sale Yields Zero Percent

  • Half-hour wait caused by Treasury verifying bid-limit rules
  • $5 billion auction is fifth straight sale at zero percent rate

U.S. Treasury debt auctions are normally routine affairs that happen several times each week and garner little attention. That changed Wednesday.

Treasury blamed a half-hour delay in auction results on verifying rules that cap the size of individual bids. The results showed $5 billion of four-week bills sold at a rate of zero percent.

“I wouldn’t characterize it as a major problem, but it better not happen again,” said Ed Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York. “If it does, they better give us a better explanation of what is going on,” added Yardeni, who coined the term “bond vigilantes” in 1983 for investors who protest inflationary monetary or fiscal policies by selling bonds and driving up government borrowing costs.

Wednesday’s sale was the smallest since the four-week bill was reintroduced in July 2001. The Treasury sold $8 billion of the securities last week, after the auction size was at its 2015 peak of $45 billion as recently as July. While Wednesday’s auction bids were due by 11:30 a.m. New York time, the Treasury didn’t post results until around noon.

The four-week bill rate was negative 0.0152 percent in secondary market trading at 3:50 p.m. New York time. Treasury Department rules don’t allow negative rates at auctions.

‘Very Rare’

The Treasury delayed the results to ensure that a rule limiting individual bids to 35 percent of an auction’s value wasn’t violated, according to a Treasury official. Wednesday’s $5 billion sale size would have put the bid cap at $1.75 billion.

“It would seem that the Treasury’s computer system would just automatically throw out all bids greater than the 35 percent limit,” said Tom Simons, a government-debt economist at Jefferies Group LLC in New York, a primary dealer. “But possibly if there were so many today, it could have caused the issue. It’s not clear.”

In December 2013, the Treasury Department postponed by a day its regular sales of three- and six-month bills, citing a problem that occurred during testing of its auction system.

“It is very, very rare for auction-result delays to happen,” said Michael Cloherty, head of U.S. interest-rate strategy at RBC Capital Markets LLC in New York, one of 22 primary dealers obligated to bid at the auctions. “Luckily, it was on a security that doesn’t have much interest-rate risk. So it’s not really harmful to anybody.”

Negative Rates

Rates on one-month bills have been negative for weeks in secondary-market trading as demand has overwhelmed supply after the Treasury slashed sales of its shortest-maturity securities as it approaches its allowable debt limit. Amid the latest debt-ceiling standoff in Washington, the government may either lift the cap or halt issuance again, after the last suspension expired in March. That leaves the Treasury little choice but to reduce bill sales as it seeks to preserve auctions of longer-term coupon securities.

“The fact that Treasury doesn’t have more of these operational issues is a testament to how successful they are in preventing these things from happening,” said Joseph Abate, a money-market strategist in New York at Barclays Plc, a primary dealer. “What is a bigger deal is the fact that the bill market goes through these periods of abrupt contraction and expansion that is driven by the debt ceiling. These are supposed to be the most liquid and risk-free instruments that are available to everyone in the market.”

Debt Ceiling

The rate on the four-week bills has been zero percent at five straight auctions going back to Sept. 15. Treasury sold $20 billion of three-month bills Tuesday at zero percent, after it sold the securities last week at that rate for the first time. 

“It happens,” said David Ader, the head of rates strategy at CRT Capital Group LLC, regarding the delayed auction results. “It’s usually that there is some sort of a glitch. It certainly attracts our attention but I don’t think it raises deeper, greater concerns,” added Ader who has been working in debt markets for over three decades and was head of interest-rate strategy at the Royal Bank of Scotland Group Plc’s primary-dealer unit during the height of the global financial crisis.

The Treasury is likely to exhaust measures to stay under the debt ceiling on or about Nov. 5, Secretary Jacob J. Lew said in an Oct. 1 letter to House Speaker John Boehner. At that point, the U.S. won’t be able to sell additional debt and may have less than $30 billion of cash. The Treasury’s daily expenditures are as high as $60 billion, he said.

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