Government Sells T Bills at 0%

In an auction on Tuesday, the Treasury sold $30 billion of short-term securities at a 0% interest rate. Investors were willing to accept 0 return to stash their cash. What does that say?

In an auction on Tuesday, the Treasury sold $30 billion of short-term securities at a 0% interest rate.  These were short-term securities with a four-week term.  The NY Times is reporting that demand was so great, the goverment could have sold four times as much.

Think about it.  Investors are so desperate to find a safe haven for their cash that they are willing to forego any interest or return.  The NY Times article quotes Edward Yardeni, an independent analyst as saying:

"The last time this happened was the Great Depression, when people are willing to accept no return on their money, or possibly even a negative return.  If people are so busy during the day just protecting the cash they have, it’s not a good sign.”

There are several explanations for this drop to 0% return.  The first is that since the Primary Reserve Fund broke the buck in September, many investors will only stash their mony in money market funds that hold a large percentage of treasury bonds.  That increased the demand for treasuries and drives down the yield.

Other explanations include foreign investors buying US denonimanted treasuries to hedge their own falling currency and portfolio and hedge funds managers moving into relatively liquid, safe investments to prepare for year-end redemptions.

Still, there can be no denying that fear is the main motivator behind all of these actions. 

I am normally a contrarian and believe that it is time to buy when everyone is selling.  This is a pretty big sell signal, a sign of some type of capitulation.  But I'm still not ready to say that the worst is over.  It's clear that despite the rally in the markets over the last week (excluding today), there is still enormous stress in the financial markets.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • ktexas

    December 11, 2008

    I was just going to post on this after I heard this on the news. You beat me to it. Seems like this will be yet another factor to push bank deposit rates down. I wonder how many rich savers who had been keeping their savings in Treasuries are now moving to bank deposits, especially now with the $250K coverage limits.

  • Sam Cass

    December 11, 2008

    You have to be fast around here :). Good point about savings. For institutional investors bank deposit products probably aren't an option but for individuals it makes much more sense to put money into a CD or savings account rather than buy treasuries. Money market funds also don't seem like a great place to be.

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