U.S. Bill Rates Turn Negative as Tax Payments Reduces Supply

Treasury one-month bill rates turned negative for the first time since June as the government sells less of the short-term debt with seasonal tax payments flowing into federal coffers.

Rates on one-month Treasury bills touched negative 0.0051 percent for a second day, down from as high this quarter as 0.04 percent, according to Bloomberg data. The average rate for borrowing and lending Treasuries for one day in the repurchase market was 0.067 percent yesterday, according to the DTCC GCF Treasury Repo index, down from as high this month as 0.110 percent.

“Bill rates have started to decline as issuance has already been cut and will continue after the upcoming tax date passes, given more cash will be coming into the Treasury,” Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York, said in a telephone interview. “There are less investable assets out there now for short-term investors.”

Net bill issuance through mid-October is set to be negative $90 billion, meaning the government has more maturing bills than it is selling during that period, a process dubbed paydowns, according to estimates by JPMorgan Chase & Co. The stock of outstanding Treasury bills should fall to $1.38 trillion in coming weeks, the bank forecasts.

Debt Finance

Treasury bills outstanding totaled $1.45 trillion as of Aug. 31, down from a peak of $2.07 trillion in August 2009 and $1.59 trillion at the end of last year, Treasury department data show. The decline in bill sales matches past seasonal patterns as the Treasury receives an influx of cash as corporations pay quarterly tax bills due by Sept. 15.

Bills outstanding peaked during the financial crisis as the government increased sales to fund economic stimulus programs. The amount of these short-tenor government securities has slid in recent years as the Treasury has sought to lock in record low rates by extending the maturity of its debt.

The Treasury sold $35 billion four-week bills yesterday, a cut from $40 billion sold the prior week and $50 billion the week before. The next increase in bill issuance isn’t likely to come until December, according to Citigroup.

“We already have several bills trading close to zero, so a fall to negative is not impossible, given the large bill paydowns ahead,” said Kenneth Silliman, head of U.S. short-term rates trading at Toronto-Dominion Bank’s TD Securities unit in New York. “The Fed’s reverse repo facility will keep rates from going deeply negative as it serves as an automatic stabilizer as many short-term investors will divert cash to the central bank and avoid bills during this time.”

Repo Market

Usage of the Federal Reserve’s reverse repo facility, which is at fixed rate of 0.05 percent, has increased this month. Money market mutual funds and other eligible counterparties allocated $168.6 billion yesterday to the facility and $180.5 billion the day before, the most since June 30, when it was $339.5 billion. This year the daily total participation at the Fed’s reverse repo program averaged $119.5 billion.

The reverse-repo facility, which the central bank is testing as tool for when it eventually removes its unprecedented monetary accommodation, has been a popular place for investors to park cash in the final weeks of the quarter and year and when other factors cut bill supply or private repos available.

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