The Great Treasury Bill Shortage

A cost-reducing win for Washington is a loss for savers

The market for U.S. Treasury bills—which mature in one year or less—is poised to shrink, creating a shortage and helping keep government borrowing costs near record lows. The Treasury Dept. will issue about $72 billion less in bills than it will pay off in December and January, bond strategists at JPMorgan Chase estimate. The result may be even lower interest rates for investors and money-market funds.

The contraction partly reflects a surge in corporate taxes that the Treasury collects this time of year, lessening its need to borrow. It also 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. As those stresses abated, the amount of bills outstanding has dropped to $1.48 trillion, or about 15 percent of all Treasury debt, the smallest percentage in almost half a century.

Investors shut out of bills may gravitate toward longer-term securities, making it easier for Federal Reserve Chairman Ben S. Bernanke to lower borrowing costs for everything from mortgages to car loans to spur the economy. The Nov. 8 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.

The rate on three-month bills was 0.005 percent at the close of trading on Nov. 15, down from 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 during periods when investors sought the securities at any price as the European sovereign-debt crisis worsened. “People are looking for low risk,” says Deborah Cunningham, chief investment officer for money markets at Federated Investors. “There’s almost an insatiable desire to own” bills.

Low borrowing costs are a bonus for the government as lawmakers struggle to reduce the budget deficit, which exceeds $1 trillion. Even though the government spent $414 billion in interest expense in the fiscal year ended on Sept. 30, 2010, the amount represented 2.7 percent of gross domestic product, less than the average of 3.9 percent when the U.S. was running annual budget surpluses from 1998 through 2001, according to data compiled by Bloomberg. “The winner in the short term is the U.S. Treasury and the Fed,” says Mark C. MacQueen, a partner at Austin (Tex.)-based Sage Advisory Services.

The losers are savers, as low Treasury bill rates help push down rates on all short-term debt. Taxable money-market funds paid an average seven-day compounded yield of 0.02 percent during the week ended Nov. 8, according to iMoneyNet. Says MacQueen: “The biggest unintended consequence is that it’s damaging for money-market accounts, the cornerstone of our financial system.”


    The bottom line: With Treasury issuing an estimated $72 billion less in bills than it will pay off in December and January, interest rates may move even lower.

    Before it's here, it's on the Bloomberg Terminal.