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Treasury 3 Month Bill Yields Fall To Negative at Trader’s Narrative





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The big new development today was the huge drop in short term Treasury bond yields. The benchmark 90 day T-Bill rate dropped to 0.005%. These are levels which we last saw just a few months ago when we were in the thick of the credit crisis:

90 day t-bill rate Nov 2009 fall to negative

The 30 day T-Bill rate 0.03% which is slightly higher than the double bottom it made in December 2008 and the end of October 2009 at 0.01%. And the 6 months T-Bill rate closed at 0.14% - a low it has seen twice before but is still jaw dropping. They haven’t seen these levels since 1958.

Even more shocking, for some short term government bonds maturing in January 2010 the rate fell to negative. I’m not sure why everyone is suddenly clamoring for US government bonds. Are they afraid that a new shock is coming to the stock market? is there some tragic news that is about to shake global financial market? or are major institutional investors simply afraid that the low interest rate environment and the dollar carry trade will inevitably lead to even more trouble?

And if so, how in the world is investing in US dollar denominated assets and trusting the US government in line with that sort of thinking? Honestly, I’m puzzled.

In any case, this is an important variable which isn’t getting as much attention as it deserves. One aspect of it is that it has an effect on the mutual fund cash level metric which we discussed before.

This is the where the level of cash held by US mutual funds acts as an indicator of market tops and bottoms. Usually it is adjusted to account for interest rates which need to be equalized to iron out the rewards during high interest rates and the punishment for holding cash in low interest rate environments.

While this indicator has been known and followed since it was introduced by Fosback in the 1970’s, I introduced an important improvement on this indicator - an idea that to my knowledge hadn’t been before; to adjust for real rates, not just nominal ones. Adjusting for the effects of deflation/inflation, mutual fund cash levels are actually very low - something which is bearish.

With this recent drop in benchmark rates, this metric drops even further into bearish territory and signals an even brighter red flashing light. And as persevering readers will remember, I cautioned that stocks had little room to the upside when the S&P 500 was at 1098.51 - it peeked above that level and has fallen again. We are now 17% above the long term trend. That’s a slight drop from 19.31% that we saw just a few days ago, but caution is still the watchword.

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2 Responses to “Treasury 3 Month Bill Yields Fall To Negative”  

  1. 1 James K

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    “Even more shocking, for some short term government bonds maturing in January 2010 the rate fell to negative. I’m not sure why everyone is suddenly clamoring for US government bonds. Are they afraid that a new shock is coming to the stock market? is there some tragic news that is about to shake global financial market? or are major institutional investors simply afraid that the low interest rate environment and the dollar carry trade will inevitably lead to even more trouble?

    And if so, how in the world is investing in US dollar denominated assets and trusting the US government in line with that sort of thinking? Honestly, I’m puzzled.”

    Seems to me that this is mostly “return of capital” (as opposed to “return on capital”) buying for the Turn. My impression is that this is different than last year at this time where trading desks were truly worried about default by a counter-party. The transformation from IB to “real” bank by places like GS and others means that there are more buyers of “safe” UST short term investments for balance sheet purposes for the December 31st turn. Add in the huge amounts of liquidity right now….. This seems to be what might be driving this return to negative bill yields. Less “shock and awe” and more “sock (away) and yawn”. Basically, more people punting over year-end, I would guess.

  2. 2 Babak

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    James, here’s today’s commentary on this from Rosenberg:

    Negative Interest Rates?
    That is indeed what occurred yesterday at the very front end of the yield curve as U.S. banks scrambled to add low-risk government securities to their balance sheets for year-end. Hence a big squeeze in the Treasury bill and the yield on the two-year note is trading south of 70bps again, just as we saw a year ago. We can only say that if the markets and the macroeconomic backdrop have truly come back to normal, this is hardly a condition we would be seeing right now. The financial system is still far from healthy, even as bonus season looms on Wall Street.

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