Fewer Treasury Bills Means 0% Rates to Persist
The market for U.S. Treasury bills is poised to shrink the most since early 2010, creating a shortage in the debt and helping keep government borrowing costs near record lows.
The Treasury Department will issue about $72 billion less debt due within 12 months than it retires in December and January, bond strategists at New York-based JPMorgan Chase & Co. estimate. The contraction partly reflects a surge in corporate tax receipts that the Treasury receives this time of year, lessening its need to borrow.
The shrinkage underscores a shift in the financing strategy of the government, which boosted bills outstanding to a record $2.07 trillion in August 2009 as it raised cash to bail out the nation’s banks amid the worst financial crisis since the Great Depression. As those stresses abated, the amount has dropped to $1.48 trillion, or about 15 percent of all Treasuries, the smallest percentage in almost half a century, driving investors to securities maturing in more than a year.
“People have no choice,” said Eric Pellicciaro, the head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets. Demand for short-term notes “is expected to remain extremely strong mostly as alternatives to place cash have diminished,” he said in a telephone interview on Nov. 10.
Last week’s auction of $32 billion in three-year Treasuries by the government received bids for 3.41 times the amount offered, the highest so-called bid-to-cover ratio since at least 1993, according to data compiled by Bloomberg. The notes yielded 0.379 percent, below the 0.393 percent average forecast in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers.
Two-year note yields were 0.23 percent at 1:17 p.m. London time, based on Bloomberg Bond Trader prices. The price of the benchmark 0.25 percent security due October 2013 was little changed at 100.01.
Rates on three-month bills ended last week at 0 percent, and were little changed today, down from the this year’s high of 0.157 percent in February and 5 percent in mid-2007, just before credit markets froze as losses on subprime mortgages accelerated.
The rate has averaged 0.11 percent since the start of 2009. It fell below zero at times as investors sought the securities at any price while the sovereign debt crisis in Europe worsened, threatening to send the global economy back into recession.
“People are looking for low risk,” said Deborah Cunningham, the chief investment officer for money markets at Pittsburgh-based Federated Investors Inc., which manages $352 billion. “There’s almost an insatiable desire to own” bills, she said in a Nov. 11 telephone interview.
Low borrowing costs are a bonus for the government as lawmakers struggle to reduce a budget deficit that exceeds $1 trillion. Even though the government spent $414 billion in interest expense in fiscal 2010 ended Sept. 30, the amount represented 2.7 percent of gross domestic product, less than the average of 3.9 percent when the U.S. was running surpluses from 1998 through 2001, Bloomberg data show.
“The winner in the short term is the U.S. Treasury and the Fed,” Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $9.5 billion, said in a telephone interview on Nov. 7. “The biggest unintended consequence is that it’s damaging for money market accounts, the cornerstone of our financial system.”
Money Fund Rates
Taxable money-market funds paid an average seven-day compounded yield of 0.02 percent during the week ended Nov. 8, according to IMoneyNet Inc., a research firm based in Westborough, Massachusetts. Investors have put a net $108.9 billion into the funds this year through September, compared with $207.6 billion in the same period of 2010, based on data from the Investment Company Institute in Washington.
Bills peaked at 35 percent of outstanding Treasuries in 2008. The government has cut back on the debt as it sells more- longer-maturity securities to reduce refinancing risk like that facing Greece, Portugal and Ireland. The average maturity of Treasury debt has risen to 62.5 months from 49.4 in March 2009, data compiled by Bloomberg show.
The last time net issuance of bills fell more over the same two-month period was in December 2009 and January 2010, when it shrunk by $161 billion.
This year the drop will start in mid-December and last through January, according to Terry Belton, the global head of fixed-income and foreign-exchange research at JPMorgan. The Treasury last had six consecutive weeks of net negative issuance in the period ended April 24, 2008, totaling $149 billion, Bloomberg data show.
“We expect bills to remain well bid for the foreseeable future,” Joseph Abate, a strategist at Barclays Plc in New York, wrote in a Nov. 11 research report to the London-based bank’s clients.
Net sales of bills have contracted by almost $300 billion this year, according to Abate. He estimates that supply will expand in February and March before shrinking again, especially if the Treasury doesn’t boost the size of its long-term debt sales and the deficit shrinks more than forecast.
Investors shut out of bills may gravitate toward longer- term securities, making it easier for Fed Chairman Ben S. Bernanke to lower borrowing costs for everything from mortgages to car loans to boost the economic recovery.
“The biggest impact on short-term interest rates is the commitment of the Fed toward the zero interest rate policy, extended till 2013,” Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $85 billion in fixed-income assets, said in a Nov. 8 telephone interview.
The central bank has pledged to keep its target rate for overnight loans between zero and 0.25 percent through mid-2013, and is now selling $400 million of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a policy traders call Operation Twist.
Rather than pushing up short-term borrowing costs, the sales are meeting with rising demand in another sign that the shortage of bills is pushing investors to buy coupon securities.
Traders submitted $757.4 billion in bids for the $55.7 billion of securities due from 2012 to 2014 the Fed sold from its holdings since Sept. 23. The 13.6-to-1 ratio exceeds the average 3-to-1 bid for the $1.85 trillion of new debt Treasury auctioned this year, government data show.
Demand is also coming from banks boosting holdings of the highest-quality assets to meet Basel III regulations set by the Bank for International Settlements in Basel, Switzerland. Bank holdings of Treasuries and government-related debt totaled a record $1.69 trillion at the end of October, up from less than $1.1 trillion in 2008.
“Treasuries are still considered the safe haven,” Brett Rose, an interest-rate strategist in New York at Citigroup Inc., said in an interview. “With the Fed on hold likely through mid-2013, there shouldn’t be a lot of expectations for much yield.”
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