Something’s Up: Panic Buying of Super-Liquid Treasuries

Tuesday, October 6, 2015
By Paul Martin

by Wolf Richter
WolfStreet.com
October 6, 2015

Despite the rally in stocks that left the S&P 500 up for the fifth day in a row, the longest such series since December, there was, at the other end of the spectrum, a whiff of panic.

It wasn’t that visible in ten-year Treasuries, though intense buying drove them higher, with the yield dropping to 1.989% Monday morning, the lowest since April, before ending the day at 2.06%. It was in short maturities, the safest and most liquid financial assets in the world: The US Treasury was able to sell $21 billion of six-month bills at a minuscule yield of 0.065%.

It also auctioned off $21 billion in three-month bills. Each dollar of the bills offered got chased by $4.14 in bids – the highest bid-to-cover ratio since June 22 when China was in full-crash mode. With buyers jostling for position to grab whatever they could, these bills sold at a yield of zero for the first time in history.

Even more liquid one-month bills have sold at zero yield in five of the six most recent auctions. And in the secondary market, some bills have traded at slightly negative yields for a while; investors who hold these bills to maturity end up with a guaranteed loss, the price they’re willing to pay to keep their money save and liquid.

But this was the first time for the Treasury to sell three-month bills at zero yield.

OK, there’s a supply issue. The gross national debt has been bouncing into the debt ceiling for months. So the Treasury can only sell new debt to replace maturing debt. The actual borrowing needs of the government are not met by selling more Treasuries but by temporarily siphoning money from other government accounts – “extraordinary measures,” as it’s called. But there is a limit. Beyond it lies the official out-of-money date, which the Treasury now projects to be November 5.

The Rest…HERE

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