Negative T-Bill rates?
December 12, 2008
Near zero and negative Treasury Bill (T-Bill) rates have been all the talk this week. Here’s a table showing some recent quotes:
Treasury Bill Yield Intraday Snapshot, Dec. 10, 2008
Take note of the negative yields for the 1/22 to 2/12 maturities, and how you have to go all the way out to June to find a yield in the double digit basis points (a basis point being 0.01%).
We saw something similar back in October. At that point the panic over money market funds breaking the buck (falling below a $1/share in value) drove investors into the Bill market in a clear flight to safety. This time around there is still an element of the safety play involved, but there’s also a larger dynamic at work.
To put it simply, there’s a ton of cash sloshing around the financial system. Part of it is from things like the TARP. Another part is from hedge funds and the like raising cash for expected redemptions. All that money needs to get parked somewhere. T-Bills is one place. The Fed Funds market is another.
This is probably where an explanation might be required.
When I say Fed Funds you probably think of the Fed Funds target rate. That and the Discount Rate are the two things the Fed moves through the Open Market Committee (FOMC). The Discount Rate is a fixed lending rate between the Fed and banks looking for funds. The Fed Funds rate, however, is an inter-bank rate. It’s what banks charge each other for lending money overnight. The Fed does open market operations to try to keep that rate in line with its target, but there isn’t anything requiring it to be at the target. In fact, the actual Fed Funds rate will often bounce around above and below the target.
A little wrinkle was added to the mix over the last few months when the Fed started paying banks interest on the reserves they keep on deposit (against loans made). That interest is based on the Fed Funds target rate. With this being the case, the implication is that the market Fed Funds rate shouldn’t really ever go below what the target rate, since that’s what the Fed is paying. Why would any bank lend another bank money at less than what they can get from the Fed, the best quality credit available?
So why is Fed Funds trading at about 6 basis points when the Fed Funds target rate is 100bps?
It’s because the the Fed Funds market isn’t just about banks lending reserves to each other. It’s an inter-bank market for overnight lending between US financial institutions (as overnight LIBOR is the same offshore). Some of the largest participants are institutions which do not have the ability to leave money on deposit with the Fed (like Fannie Mae and Freddie Mac). They want to put their money to work, so they lend it to other institutions.
We can think of the situation like this.
Those who have access to the Fed Funds market (banks and other financial institutions) are flooding that market with cash. Those who don’t have access to that inter-bank market (hedge funds, mutual funds, etc.) are flooding the T-Bill market with cash. The result is money market rates at ridiculously low levels.
Oh, and I recently heard that there are something like $600 billlion in excess reserves on deposit with the Fed. That’s money banks have posted above and beyond what they are required to against the loans they have made.
Where has all this cash come from?
Like I said, some of it’s come from the government’s programs like the TARP pushing money into the system. A lot has come out of the financial markets, in part contributing to the trillions of dollars of market value losses stocks and commodities have seen this year. There’s also been repatriation of overseas money back into dollars, which is contributory to the greenback’s recent rise.
The reason I bring all of this up is to highlight some of the things going on which many individual traders never think about or consider. Knowing where the money is going to and coming from can help you anticipate future market moves.
So what does all this cash in T-Bills, Fed Funds, and bank reserves suggest to you?
Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.
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