Treasury Bills at 60-Year Low Distort Risk Signal, Barclays Says

The shrinking supply of Treasury bills is distorting a risk signal normally associated with the health of the banking sector, according to Barclays Plc.

The TED spread, the difference between the London interbank offered rate for three-month dollar loans and the rate on similar-maturity Treasury bills, has risen steadily since January last year and is now half-way to its peak reached during the sovereign-debt crisis in 2011.

Barclays says the stresses that the measure shows are misplaced and instead reflect an imbalance between bill supply and demand. The short-term securities now account for 11 percent of Treasury debt available for trading, the least in more than 60 years, according to Barclays.

“There are few signs of heightened risk aversion in front-end markets” and the increase in the TED spread “has attracted some attention,” Barclays New York-based analyst Joseph Abate wrote in a research note.

The TED spread was at 26 basis points as of 2:02 p.m. London time, having touched 30 basis points on July 13, the most since December 2012. The gap reached more than 460 basis points during the Lehman Brothers meltdown in 2008, data compiled by Bloomberg show.

Barclays said the spread may narrow because the supply and demand balance is poised to improve when the Treasury increases issuance of bills.

The Treasury announced earlier this year it will raise its daily operating cash balance to a daily average of as much as $200 billion from $60 billion. It will finance this buffer with increased bill sales.

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