T-Bills hit 0%

Amid the good news that the banks are beginning to lend again, the 4-week Treasury bond market is showing something different, which makes me suspect some mixed signals out there.  Quote and link from the article:

Investors are so nervous they're willing to accept the same return from government debt that they'd get from burying money in a coffee can — zero.

Hmm, suddenly apparently the financial equivalent of a mattress doesn't seem so bad; in fact, in trading at times T-bills hit a slightly negative rate.

The bid-to-cover ratio for this $30 billion in borrowing at 0% was actually 4.2- that is, 4x as much money wanted in as was asked for by the government, indicating a highly successfull auction and much more demand than availablity.  

Maybe I'm wrong about the US Government running out of the ability to borrow- if they could have potentially raised $120 billion in this auction of bonds.....at 0%.

Indeed, Seeking Alpha asks a similar question, why would someone buy T-bills at negative return? Their answer:

The only reason why anyone would buy Treasury bills at negative real return is if they believe that recession will deepen, driving bond prices higher and yields further below zero.

Are investors buying them? Yes, according to the International Herald Tribune and notes:

"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," said Edward Yardeni, an independent analyst. "If people are so busy during the day just protecting the cash they have, it's not a good sign."


Thomas Atteberry, a bond fund manager, said at current prices the market is predicting that the United States will suffer the kind of "lost decade" that Japan suffered in the 1990s.

"I have a hard time justifying that," said Atteberry, a partner at First Pacific Advisors. "The Fed seems much more upfront about boosting its balance sheet by creating money."

So basically, this is a huge bet- investors who are doing this are in essence "shorting" the concept of any recovery in the next quarter. Or perhaps even longer terms:

Yields for longer term Treasury securities have also slumped, with the 10-year now yielding 2.64 percent, down from 2.7 percent Monday and 3.75 percent a month earlier. That decline appears to reflect several other forces. Many investors are seeking safety because they believe that the economy is in its worst recession since the Depression. Rather than inflation, which was a worry for some a few months ago, many are now worried about deflation, or falling prices.

I believe in the idea that we're in a deflationary spiral, and I'm a bit of a pessimist- but not even I would bet that the average inflation over the next DECADE would be less than 2.64%.



Both points are consistent

Banks have been stuffed with so much gobs and gobs of money that they can (1) stuff the entire world's supply of mattresses with it, and (2) lend some of it out.

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And that is the problem

and why TARP should at this point be considered a failure. Instead of lending money, banks and other major financial institutions are putting their money into treasury securities. Really, it's a major "poker tell" on how they REALLY feel about the economy. To use the now-abused saying, it isn't the return on their money but the return OF their money.

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Robert got back to it before I did

I had a meeting I had to get to, so thanks Robert for finding those two additional articles, but I just had to make it my own, see the revision history for timeline of edits. Basically, Robert added the middle two quotes from Seeking Alpha and IHT, and then I added additional quotes and my analysis of what that meant: there are people who are more bearish than I am out there (which is a scary thought).

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Maximum jobs, not maximum profits.