Finding a positive in negative yields
Armageddon isn’t what it used to be.
Last year, investors paying the government for its short-term debt crystallized the panic in the financial markets. Few trusted anything not backed by the full faith and credit of the U.S. government. This week, yields on short-term Treasury bills briefly turned negative, meaning that investors would have to pay to own short-term securities if they chose to push the button on the trade.
Yet it’s not panic driving money into Treasury bills this time around. Instead, banks and other investors like money-market funds are making a cool and calculated decision to grab super-safe securities to gussy up balance sheets and put idle cash to work before the end of the year. With the Fed holding overnight rates close to zero, don’t be surprised to see these yields flirt with negative territory again.
Such window dressing is nothing new. Loading up on investments like U.S. Treasuries to make balance sheets look better is typical ahead of the end of the quarter and year.
What’s unusual is that it’s showing up earlier as the competition for such squeaky clean securities is likely to be much greater than it has been in the past.
A change in the fiscal calendar is escalating the competition.
Major banks will be marking the end of the year at the same time in December. Before the 2008 mayhem, quarterly reporting periods were staggered with broker-dealers ending the year in November and deposit-taking banks in December. That made for less noticeable grabs for Treasury bills and other assets. Not only will they be competing with each other, but also with money-market funds and other investors with a mandate to find a home for excess cash.
Then there’s the sheer amount of cash sloshing around in the banking system — more than $1 trillion, according to the Federal Reserve’s latest count, some of which will need to be invested before closing time. Before the crisis, the amount was closer to around $300 billion.
It’s no surprise that demand has centered on bills maturing early next year. In fact, demand is so great that these otherwise liquid securities are becoming harder to find in the repo market, where dealers finance their trading positions.
The Fed’s zero-rate policy means that it won’t take much to push bill yields into the red again.
Negative yields may be painful, but at least they’re not signaling doom ahead.