Treasury Bill Rates Reach Highest Since '08 Before Fed Liftoff

  • Murky Fed tools have funds favoring shortest-maturity bills
  • Spread on 12-month over one-month bills is highest since '09

Even 12-month Treasury bills are too risky for some investors as the Federal Reserve prepares to raise interest rates for the first time since 2006.

Rates on bills due in a year are the highest since 2008, and the furthest above one-month bill rates since 2009, as money-market funds seek out the very shortest maturities with the Fed’s liftoff potentially a week away.

The U.S. government’s one-year obligations yielded about 0.73 percent as of noon in New York, while the rate on one-month maturities was about 0.19 percent. Money-fund managers are favoring the shortest-dated, easiest-to-trade debt in part as they’re leery of the mechanics of the Fed’s likely move next week. Once concern is that any volatility in money markets may spur investors to yank out cash.

“Money-market fund investors, which represent the biggest pool of buyers in this sector, are trying to stay in the shortest maturities possible,” said Kenneth Silliman, head of U.S. short-term rates trading in New York at TD Securities, one of the 22 primary dealers obligated to bid at Treasury sales.

“They don’t really want to go beyond two- to three-week investments given uncertainty on the level of possible fund redemptions as the Fed tightens and into year-end,” he said. “There is still a little bit of a murky picture” on the exit mechanics.

The weighted average maturity of the 100 largest U.S. money funds tracked by Crane Data LLC has slid to 35 days, matching the lowest level in the research firm’s data going back to 2006. The measure is down from the peak this year of 45 days, set in February.

Not all investors are fleeing the 12-month maturity. The one-year rate is down from where the Treasury Department sold $14 billion of new bills Tuesday at 0.74 percent -- the highest auction yield for that tenor since November 2008.

“We did see massive buying overnight, after the auction rate proved so high,” Silliman said. “Some people, not the traditional money-market fund buyers, did come to buy some year bills as they are now very cheap.”

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