Treasury Bills Trade at Negative Rates as Haven Demand Surge

[Mrs. Sharon B. Hodge]

Treasury Bills Trade at Negative Rates as Haven Demand Surges


By Daniel Kruger and Cordell Eddings

Dec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.


The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.


“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.
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The benchmark 10-year note’s yield tumbled 11 basis points, or 0.11 percentage point, to 2.63 percent at 4:48 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 31/32, or $9.69 per $1,000 face amount, to 109 23/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.


The two-year note’s yield fell 10 basis points to 0.84 percent. It dropped to a record low of 0.77 percent on Dec. 5.


If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56.


‘Horrible Year’

Indirect bidders, a group that includes foreign central banks, bought 47.2 percent of the four-week bills, compared with 31.7 percent in the prior auction. Primary dealers bought 52.1 percent, while direct bidders such as individual investors purchased 0.7 percent.


“It’s been such a horrible year people want to show they have the good stuff on their balance sheets, not the bad stuff, but with yields already so low it pushes these even lower,” said Theodore Ake, the head of Treasury trading in New York at Mizuho Securities USA Inc., another primary dealer.


The rate on four-week bills peaked at 5.175 percent on Jan. 29, 2007. The government began issuing the four-week bills in July 2001, according to Stephen Meyerhardt, a spokesman for the Bureau of Public Debt in Washington. The bills are intended to reduce the government’s reliance on irregularly issued cash management bills.


Meyerhardt wasn’t aware of the three-month bill ever trading at a negative rate before.


Housing Slump

Treasuries of all maturities have returned 11.4 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. That compares with a 39 percent loss in the Standard & Poor’s 500 Index, including reinvested dividends.


Bonds have surged as the U.S. housing slump pushed up the cost of credit globally, causing equity markets to tumble. The world’s biggest financial companies incurred almost $1 trillion in writedowns and credit losses since the start of last year, helping push the major economies into recession.


Treasuries rallied today as stocks snapped a two-day winning streak after companies from FedEx Corp. to Danaher Corp. forecast earnings that disappointed investors as the deepening recession crimps sales. The S&P 500 lost 2.3 percent.


‘The Bottom Line’

“The bottom line is there’s still a good amount of cash on the sidelines, and people are trying to figure out how they want to allocate that capital,” said Richard Bryant, a trader of 30- year bonds at primary dealer Citigroup Global Markets Inc. “The answer is still Treasuries for a lot of people.
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The National Association of Realtors’ index of signed purchase agreements, or pending home resales, fell a less-than- forecast 0.7 percent to 88.9 from a revised 89.5 in September, according to a report from the group today in Washington.


Futures contracts on the Chicago Board of Trade show 100 percent odds t the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 38 percent a week ago.


Rate predictions based on the futures are not considered as accurate as they once were because the central bank hasn’t sought to bring the daily effect rate to the level of its target.


Mutual Funds

Money-market mutual funds that buy mostly Treasuries are starting to turn away new investors as the record low yields pull down returns for shareholders and squeeze managers’ fees.


At least three Treasury money-market funds run by JPMorgan Chase & Co., Evergreen Investments and Allegiant Asset Management recently stopped taking outside cash, according to Web site notices and regulatory filings. Barring new customers protects returns for investors already in the funds because managers don’t have to buy as many new Treasuries with yields lower than current holdings. Higher fund yields also prop up management fees.


The record low borrowing costs for the Treasury Department may turn out to benefit President-elect Barack Obama as he faces a widening budget deficit while pledging to embark on the biggest U.S. public works plan since the 1950s to stimulate the economy.


The U.S. is headed toward $1.5 trillion in debt sales as the budget deficit approaches $1 trillion in the 2009 fiscal year according to Bank of America Corp. The deficit this year was $455 billion.


The Treasury will sell $28 billion of three-year notes tomorrow and $16 billion of 10-year notes the following day. The $44 billion total is about $3 billion more than expected by Wrightson ICAP LLC.


To contact the reporters on this story: Daniel Kruger in New York at [e-mail]; Cordell Eddings in New York at [e-mail].


Last Updated: December 9, 2008 17:00 EST

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