Post-Lehman Deja Vu As T-Bill Yields Turn Negative

[TechGuy]

This is scary big news. If you have cash in the bank beyond what you need for the next month, pull out the excess. You can always put it back later, but this kind of news is why I monitor this forum. Amidst all the flotsam and jetsam is the occasional lifesaving nugget. This is one of them. Looking at history, this kind of action always  precedes something really bad happening

The gov't hasn't given up on bailouts. For a banking collapse, the gov't will have to start letting big banks fail, which they won't. They will pull the same trick as last time and print a boat load of new money to prop up the system again. As long as the dollar has some reasonable vaiue and the gov't controls the printing presses, there won't be a deflationary collapse. The only think that is going to collaspe is the dollar in slow motion, as investors slowly exit the dollar into commodities, hard assets and foriegn currencies.

The strong demand is very likely do to a potential stock market correction and a bond market correction. If investors believe interest rates will be going up soon, then investors want to exit long term bonds to avoid getting haircut. Same with a Stock market correction.

 Also consider that Banks and brokages may be purchasing treasures on the behalf of investors holding cash in their accounts. A Money Market or brokerage need to invest in very short term bonds since there clients make chose to make security purchases at any time. Notice that many Money market accounts have a 7-day yeild as the invest in very short term bonds, such as treasuries and commerical paper. Perhaps because there is also a shortage of AAA rated commerical paper, they are piling Money Market money into treasuries.

[kathleen]

And so it begins for Roberto...

Ha! I loved that.

[AreWeThereYet]

But that's the secondary market.  Buy/sell demand drives the yields.  The more you pay..the lower the yield.
If you buy at par at the auction then the rate is positive.  Not much play there though as the rate is less than 1%.

Why would someone buy in the secondary market for over par and get no yield ??

[Annihilatrix]

Return OF is more important than return ON.

But that's the secondary market.  Buy/sell demand drives the yields.  The more you pay..the lower the yield.
If you buy at par at the auction then the rate is positive.  Not much play there though as the rate is less than 1%.

Why would someone buy in the secondary market for over par and get no yield ??

[AreWeThereYet]

Return OF is more important than return ON.

But that's the secondary market.  Buy/sell demand drives the yields.  The more you pay..the lower the yield.
If you buy at par at the auction then the rate is positive.  Not much play there though as the rate is less than 1%.

Why would someone buy in the secondary market for over par and get no yield ??

But they are still losing...I pay $101 for a paper worth $100 ?
When that matures they will only get face value and 0 interest.
I'd just submit for the next auction and pay par and get interest to boot.

Something is fishy though since it's so easy to just buy the next week's auction..these are short term paper.

[Alan NJ]

Maybe people are betting on this commercial real estate bubble popping over this Christmas.  

Don't most stores only stay open all year so people will remember they exist when it's time to buy presents in December?

Subprime last year took out how much? $600b-1T?  This wave of CRE is $1.5 trillion (?)   When all that paper wealth in CRE goes tits up, we will have another deflationary period like with the housing bubble pop.

Maybe these negative interest bills look safe to people who know what's about to happen?

[AreWeThereYet]

Well they didn't close with a negative yield.  All closed in positive yield terrority. So this must have just been a blip during trading hours.
A few "market" orders and yup..could easily go into negative terrority.

http://www.bloomberg.com/markets/rates/index.html

The "current price/yield" column is what you want to look at.

[hard rain]

Yeah it may be an ominous sign.

We saw the same things happening last year when equities were crashing. Dollar was up, everybody rushing to US Treasuries.

Dollar carry trade: borrowing ultra low interest dollars to buy riskier higher paying investments. Unwinding of carry trade: selling riskier assets (including equities), buying dollars to be  on "sidelines" in cash.

How else do you get/keep "cash"? Can't keep it in a bank, banks way too shaky. Can't get large amounts of currency and you are labeled a criminal. Gold is volatile, and is subject to deflationary collapse, as are all commodities.

Comparatively speaking, US Ts are simple and easy (also money market accounts of strictly short-term Treasuries). They are very liquid. Don't have to worry about FDIC limits or waiting for payoff if bank folds.

Moreover, if dollar goes up (and it will in the unwinding of the dollar carry trade), foreign purchasers will benefit from dollar strengthening.

For all these reasons, buyers will accept a slightly negative interest rate.

The reason it is warning sign is that it suggests growing risk aversion.

[PurpleKoolAid]

Treasury Yield Plunge Sends Warning

The author of this Barron's article suggests it's a sign that the FED will maintain a rock-bottom fed funds target rate for quite a while longer.


http://online.barrons.com/article/SB125869502873557185.html?mod=BOL_hpp_dc

[nomore]

Bank of Japan's keeping their rates low too (heard it this morning on BBC World News on BBC America, sorry no link to share)

[Ming]

I've said it for a couple of months.  Something is brewing, something is off with money markets. 

The push for brokerage firms to move your money to the bank side of their firms is up Dec. 1. 

I say they are all going to quit paying $1.00 for $1.00 like what happened with the Reserve Fund in Sept of 08. 

Hope I'm wrong.

[Rival]

Investers purchasing assets with an expected negative rate of return means one thing and one thing only:

They believe that the actual value (as opposed to nominal value) of the purchased assets will increase in the given timeframe, and expect an increase in variance between nominal and actual value of assets. In this case, the investors MUST believe that the dollar will strengthen at a rate in excess of the negative interest rate, and that they can use the future exchange rates to garner more Euros, or Yen, or whatever currency they want, or even commodities. They are dollar bulls, nothing more. Quite a contrarian play considering the current opinions being bantered about with regards to the futute of the USD. But no one gets rich following the crowd.

I would suggest this is just a natural extention of the carry trade, or more precicely an indicator of the strength of the dollar carry trade. Imagine I can get a HELOC for 5%. That money (from my perspective) has a negative rate of return. Sounds like a dumb idea. So I invest the money in gold, expecting the dollar to nosedive. In one year I make 50% return on the gold. I just turned a -5% interest rate into a +45% profit. Classic carry trade, and this is why people are buying t-bills at negative interest rates. They expect to sell them later when the trade value of the USD has increased. This strategy can also be used as an effective hedge if you think commodities are in a bubble, which many do.

[Zac]

Serious question. Is being in cash or cash equivilant a good prospect at this point?

I don't think so.  If you have a significant amount (>10K) of money to invest, I would suggest the oil and gas royalty trusts (MTR is one of my favorites).   

I have more confidence in the future value of physical commodities (toilet paper, motor oil, laundry detergent, non-perishable food, etc.) than anything else at this point.  I'm ambivalent about precious metals.  They're preferable to currency, but I'm far less confident about their future value than essential physical commodities.   

[cygnus]

Serious question. Is being in cash or cash equivilant a good prospect at this point?

I recently got out of all equities and turned my wife's retirement into 50% T bills and 50% Money market. Do you think this is a good decision in light of this article.

BTW this has the hairs on the back of my neck up. I am not that good with bonds and TBILLS and that part of the economic cycle. But this news has people REALLY nervous and that makes me nervous..

I would say this is BIG news and should be watched closely.

Robert

Btw, Robert - if things start to look *really* bad, check with your wife's pension plan to see if they offer a "guaranteed" money market.  Ours (TIAA-CREF) has one that yields at least 3%, and more most years.  You are supposed to be guaranteed (insured) to have no losses of capital, although I don't know how good that insurance really is.  The only catch is, once you put money in there, you can't take it back out.  Until you can cash the whole thing in, that is.  But if things get really bad and you are facing losing a bundle, it might be worth considering. 

[AreWeThereYet]

Serious question. Is being in cash or cash equivilant a good prospect at this point?

I recently got out of all equities and turned my wife's retirement into 50% T bills and 50% Money market. Do you think this is a good decision in light of this article.

BTW this has the hairs on the back of my neck up. I am not that good with bonds and TBILLS and that part of the economic cycle. But this news has people REALLY nervous and that makes me nervous..

I would say this is BIG news and should be watched closely.

Robert

Btw, Robert - if things start to look *really* bad, check with your wife's pension plan to see if they offer a "guaranteed" money market.  Ours (TIAA-CREF) has one that yields at least 3%, and more most years.  You are supposed to be guaranteed (insured) to have no losses of capital, although I don't know how good that insurance really is.  The only catch is, once you put money in there, you can't take it back out.  Until you can cash the whole thing in, that is.  But if things get really bad and you are facing losing a bundle, it might be worth considering. 

They are also called "stable funds".  Only retirement accounts like 401K's can have them.  There's underlying insurance taken out for these funds that guarantee the $1.00 value.