Negative Rates on Treasury Bills Show Little Debt-Limit Concern

A slide below zero in rates on some Treasury bills that mature beyond October shows investors have little angst lawmakers may fail to agree on a debt limit.

Treasury bills that mature as soon as November traded below zero today, with the bill maturing on Nov. 29 having a negative 0.005 percent rate at 2:02 p.m. New York time. The three-month bill rate was negative 0.0051 percent, compared to 0.0152 percent yesterday. Treasury bills that mature on Oct. 24 were at a rate of 0.038 percent, up from 0.018 percent yesterday.

Treasury Secretary Jack Lew told House Speaker John Boehner in a letter yesterday that the U.S. will exhaust extraordinary measures related to debt limit no later than Oct. 17.

“Right out of the gates this morning, there were large institutional sellers of the Oct. 24 maturity Treasury bills, given Lew’s comments that Oct. 17 is a drop-dead date for the debt limit,” said Kenneth Silliman, head of U.S. short-term rates trading at Toronto-Dominion Bank’s TD Securities unit in New York. “That is really a red zone if a technical default were to occur. But demand for bills that mature from November onward remains strong, showing that investors think that whatever might happen with the debt limit would be temporary and that the bill-supply situation is still relatively dire.”

Shrinking Auction

Helping push yields lower on three-month bills was an announcement today by the Treasury that it was cutting the size of its regular auction of the debt on Sept. 30 to $25 billion from $30 billion at the previous auction.

With regard to weekly bill auctions sizes, “we are entering a period of greater uncertainty due to the debt limit,” wrote Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, in a note to clients today. “The Treasury will pay down bills in order to make room under the current ceiling for the settlement of the mid-month coupons on Oct. 15. We expect the Treasury to rely on short-term cash-management bills to bridge the gaps created by the paydowns in regular bills.”

A falling supply of Treasury bills has been met with persistent demand for the securities, viewed among the world’s safest, in part as heightened regulatory requirements increase banks’ need for the debt.

The Federal Reserve Bank of New York is currently holding tests of an overnight fixed-rate full allotment reverse repurchase agreement facility that may be used to aid policy makers when they tighten monetary policy. The actions, which temporarily remove cash from the system and add Treasury debt, are open to the Fed’s 139 tri-party reverse repo counterparties, which includes 94 money market mutual funds, six government-sponsored entities, 18 banks and the Fed’s 21 primary dealers.

If concern about the debt limit increases, there will likely be more participation in the New York Fed’s daily reverse repo facility operations, said Silliman.