Money Market Rates Fall Below Zero as Treasury Bills Retain Haven Demand
Money market rates, which surged during the debate to raise the federal borrowing cap, dropped below zero percent as Europe’s sovereign-debt crisis bolstered U.S. government securities’ appeal as the world’s safest assets.
Demand for short-term government debt instruments is rising as Treasury bills are expected to remain in short supply after the U.S. signaled yesterday it won’t increase sales of the securities even following lawmakers’ agreement to raise the debt ceiling. Interest also was stoked when Bank of New York Mellon, the world’s largest custodial bank, said it will begin charging clients for “extraordinarily high” cash deposits.
“We are back at square one in terms of where we were two, three or four weeks ago, before the debt-limit debate escalated,” Jerome Schneider, head the short-term strategies and money markets desk at Newport Beach, California-based Pacific Investment Management Co., said in an interview. “Market participants remain vigilant of the risks coming from Europe. And as investors adjust their credit appetite, the opportunity set of other short-term money market assets to own will become increasingly limited.”
European Central Bank President Jean-Claude Trichet said today the ECB has resumed bond purchases and will offer banks more cash to stop the region’s sovereign-debt crisis from engulfing Italy and Spain.
One-month Treasury bill rates traded at zero percent today after earlier falling to negative 0.0102 percent. They closed yesterday at 0.0051 percent yesterday and reached 0.1825 percent on July 29, the highest since February 2009.
Overnight general-collateral Treasury repurchase-agreement rates averaged 0.07 percent through 2:50 p.m. New York time, according to ICAP Plc, the world’s largest inter-dealer broker, unchanged from yesterday. That was down from 0.32 percent on Aug. 1.
President Barack Obama signed a bill Aug. 2 to raise the U.S. debt limit by at least $2.1 trillion, averting by hours a first-ever U.S. default. Investors still speculated the nation’s credit rating may be cut. Yields on Italian and Spanish bonds climbed to records this week as investors sought a refuge from Europe’s debt turmoil, boosting demand for Treasuries.
“There has been a confluence of factors this week that have been really bullish for front-end rates, starting with the passage of the debt-ceiling increase that took Treasury default risk off the table,” said Brian Smedley, a strategist in New York at Bank of America Merrill Lynch, said in an interview. “Investors have started to move back into money market funds, and fund managers are also putting cash to work that was on the sidelines.”
Bank of New York Mellon’s announcement that it will begin charging clients a 13 basis point fee for “excess amounts of cash” helped accelerate the repricing of short-term U.S. government securities, Smedley said. A basis point is 0.01 percentage point.
The bank, in an Aug. 2 note to clients, said its deposits are surging as “investors en-masse de-risk and become highly liquid.” As markets stabilize and cash levels drop, “it is likely this fee will no longer be necessary,” the bank said in an e-mailed statement.
The Standard & Poor’s 500 Index tumbled 3 percent, and Treasury two-year yields fell to a record low amid concern the economy is weakening. The yen slid the most since 2008 against the dollar after Japan sold the currency to weaken it.
Swiss Central Bank
Yesterday, the Swiss National Bank unexpectedly cut interest rates and said it will increase the supply of francs to money markets to curb the “massively overvalued” franc, pushing the currency, typically purchased as a haven, down from a record 76.10 centimes per dollar.
The balance in the Treasury’s Supplemental Financing Program, known as SFP, declined to zero in July, the department said yesterday as it outlined details of next week’s quarterly refunding auctions.
‘At this time, Treasury does not plan to resume auctions of bills under the SFP in the near term,” the announcement said, adding that the department retains the “flexibility” to increase the SFP size in the future.
The Treasury had sold SFP bills on behalf of the Federal Reserve as part of the central bank’s efforts to prop up the financial system. The department began in February gradually allowing its $200 billion worth of 56-day SFP bills to diminish as they matured to help avoid exceeding the U.S. debt limit.
Default Risks Ebb
Short-term bill and repo rates will also soften further as the risks associated with a U.S. debt default have ebbed, Pimco’s Schneider said. Rates had soared at the start of the week as investors were wary of longer-term U.S. debt while the risk of default remained.
The average rate for overnight federal funds, known as the fed effective rate, was 0.12 percent yesterday, down from 0.16 percent the day before. The rate had fallen to as low as 0.06 percent from July 12 through July 26, the least this year. That compares with the central bank’s target rate for overnight loans between banks of zero to 0.25 percent. The rate opened at 0.12 percent today.
Treasury bills as a percentage of the government’s total debt portfolio have fallen to 16 percent as of June 30, down from as high as about 35 percent in the fourth quarter of 2008, and an average of 24 percent from 2000 through 2007, the Treasury showed in a chart on page 13 of its discussion material released yesterday with refunding documents.
“Bills will still be relatively scarce, given how stiff the liquidity requirements are around the world that everyone faces now,” said Lou Crandall, the chief economist at Wrightson, a Jersey City, New Jersey-based unit of ICAP that specializes in U.S. government finance research. “High-quality short-term assets are generally in short supply. The fed effective rate will likely fall back to single digits by the end of the week.”
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