Tuesday, December 9, 2008

Treasuries Go Negative

. Tuesday, December 9, 2008

Yesterday, 3-month T-bills traded slightly negative, while 4-week bills traded at 0.0% interest. In other words, investors were willing to accept a small negative return rather than risk larger losses elsewhere. This is good news for the government's balance sheet, but what does it mean for investors? A few things:

1. Confidence is exceptionally low.

2. Investors alluvasudden have a negative time preference for money.

3. Expectations about future inflation indicate that investors expect a dollar to be worth more in the future than it is today. In other words, bond markets expect deflation.

1 is definitely true, 2 is definitely false. i've been harping on 3 recently but even if it is true, why not just hold cash? Anybody got a better explanation? Is this being driven by large investment institutions who have to balance budget sheets and cash (for some reason) won't suffice? I'm really at a loss.


Thomas Oatley said...

I don't know Will, but here's a guess. Maybe a lack of confidence in banking sector? If you're coming out of the market, where are you going to park big chunks of cash (many times more than FDIC coverage)--in a commercial bank? Seems T-bills are the best bet for short term parking.

Kindred Winecoff said...

i thought of that, but the FDIC recently expanded their coverage limits, and also moved to guarantee money market accounts (IIRC).

my best guess right now is that this is driven by corporations who a.) have a bunch of extra cash around and are forced by law or charter to purchase extra-safe assets; or b.) by corporations who have end-of-the-year reviews coming up and want to show safe assets on the sheet next to counteract any trash that still there.

or, it could be SWFs who will take a small loss in dollars rather than risk greater losses in their local currencies.

just guessing.

Anonymous said...

It would be the sovereign wealth funds, the hedge funds, the mutual funds, the insurance companies, and some banks who would a) have a ton of cash and b) need to guarantee that it will not decrease in value. They are worried about continued fund redemptions and policy loans.

The FDIC has a limit of $100,000 per account (temporarily raised for about 12 months to $250,000), but the entities above will need to park millions of dollars, not a hundred thousand dollars.


Treasuries Go Negative




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