Friday, March 27, 2009

How Bad Is It? One-Month Treasury Bills Go Negative!

I read this shocking nugget at

Treasury one-month bill rates turned negative for the first time since December as investors sought the most easily-traded securities to bolster balance sheets at the end of the quarter.

Financial institutions earn interest on funds deposited with the Federal Reserve. At quarter end, banks prefer to carry securities on their balance sheets instead of cash, driving demand for bills, according to Donald Galante, chief investment officer and senior vice president of fixed income at MF Global Ltd. in New York. He expects rates to rise again by mid-April.

“We’re in a funds rate range of between zero and 0.25 percent,” said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “If you keep rates this low, you’re going to end up having periods, especially in the Treasury bill market, where the yield goes negative.”

Historical Performance

The rate on the one-month bill dropped to negative 0.04 percent in New York, compared with 0.03 percent yesterday. It was last negative on Dec. 26, when it reached minus 0.05 percent. Three-month bill rates fell four basis points to 0.15 percent, while six-month bill rates fell two basis points to 0.38 percent.

So you're clear on this: If you invested $10,000 in one-month bills, you would lose $4 annually!?! I know the Federal Reserve has lowered the prime rate dramatically, and that other interest rates tend to follow similar trends...but this is disturbing. Disturbing, as in, banks and investors are buying these! On purpose!

What does this say about the state of our economy and financial institutions? In fairness to the discussion, the article gives some reasons why the rates have sunk so low and why, in the short term, some banks might choose to purchase such securities. Furthermore, they are expected to return to positive ground in a few weeks.

On the other hand, it might be a great time to refinance your mortgage.

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