The un-terrifying Treasury bill market

By Felix Salmon
October 8, 2013

Neil Irwin isn’t mincing words. “What’s happening in the Treasury bill market today should terrify you” is the headline, and this is the accompanying chart:


That is indeed a nasty spike! But it isn’t remotely as terrifying as Irwin says.

For one thing, let’s put the instrument in question into context. Here’s the chart that I get, when I bring up the same instrument on my Thomson Reuters Eikon terminal. It shows more clearly just how few data points we’re really talking about here: these things are spiky. Here’s another reason not to take these charts too seriously: if you take a second look at Irwin’s chart, it shows that the bill was trading at a negative yield in mid July; I would deduce nothing from that datapoint except for that the data is noisy, and it’s hard to draw too many conclusions from it.

Chart 912828RN2=TWEB.png

Here’s another version of the same chart, showing the price action just for the past five days. Again, this isn’t terrifying, so much as it’s just plain noisy:

Chart 912828RN2=TWEB.png

Wait, did I say price action? Scratch that, I meant yield action. The price action shows you the simple truth of the matter — and it’s so boring I can’t even work out how to make a chart of it. Still, I can give you the numbers: the Treasury bill maturing on 10/31/2013, with a coupon of 0.25%, is bid at 99 253/256, to yield 0.446%, and is offered at 100 1/256, to yield 0.184%.

So, here’s Irwin’s dystopian fantasy:

If, for example, investors were only willing to pay $950 for a 90-day, $1,000 bill (about a 20 percent annualized interest rate), then the government would run into its legal debt limit even faster than it is now scheduled to.

And here’s the reality: let’s say the yield on your $1,000 bill soars to a terrifying 0.446% from a relatively benign 0.184%. That means the price of your bill has plunged from $1,000.04 all the way to $999.88. You’ve lost a whole 16 cents — or 0.016%. If the price of your bond continues to dive at that rate every day, then after a couple of months you might start approaching a full 1% drop in paper wealth!

If you look at the actual price action in Treasury bills, then, it isn’t terrifying in the slightest; what’s more, it’s very difficult to separate signal from noise. There’s no indication whatsoever that it’s significantly raising the US government’s cost of borrowing, and there’s not even any real evidence that what we’re looking at here reflects credit risk being abruptly inserted into the interest-rate market.

For the fact is that Treasury bills trade far too close to par, far too predictably, for them to really trade at all. If you want to buy Treasury bills, you buy them at a Treasury auction, you hold them to maturity, and then — most likely — you roll them over into a new series of Treasury bills. On the other hand, if you want to trade day-to-day movements in short-term interest rates, you don’t go to the Treasury bill market at all: instead, you go to Chicago, and use the eurodollar futures market, or something like that.

The Treasury-bill market, then, is a bit like the market in US CDS: it’s a thin market which is being asked to support much more rhetorical weight than it can reasonably bear. In the real world, Treasury bills remain an absolutely safe market — and I fully expect them to continue to trade at (or extremely close to) par even if we hit the debt ceiling. The world will get much riskier, if that happens — and in a risky world, US government debt is still going to be the safest possible asset.


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It’s all about the repo market….

Posted by joe99 | Report as abusive

never mind the secondary trading, Felix – same math applies to the auctions.. like this one which the usual hypesters were ranting about today: sult/press/preanre/2013/R_20131008_1.pdf

yes – the price of the bond was 99.972778% to get the MASSSSSSIVE (sarcasm alert) yield of 35.5 bps…

Posted by KidDynamite | Report as abusive

the trouble you fail to recognize is that a one month treasury is not an investment vehicle; it is used as cash, the same way you use the $20 dollar bill in your wallet…

so while “a full 1% drop in paper wealth” may be chicken feed in investment terms, if the reserve medium of exchange falls by even a fraction of that, it upsets a whole lot of financial applecarts…

Posted by rjs0 | Report as abusive

rjs gets it. think in terms of money market funds and the repo market & you will find why it may be a problem.

Posted by joe99 | Report as abusive

What pricing source are you using? I see the difference in bid and ask yield as a mere 0.005%. (At the moment I write, the bid yield is 0.294%, and the ask yield is 0.289%). I think perhaps your Reuters terminal isn’t giving you good information.

And I happen to agree with “rjs0″ above. We live in a ZIRP world, and these things should be equivalent to cash. A 30bp discount is a big deal, given other sovereigns (UK, Germany) have a 0bp discount.

Posted by Adam7 | Report as abusive

keep in mind Felix doesn’t know how overdraft protection works so read his “stuff” for its entertainment value.

Posted by AliceDFinance | Report as abusive

Notwithstanding the jump in yields of short-term T-Bills, I think what’s missing here, is the inverted yield curve and what *that* says.

Posted by GRRR | Report as abusive

There are a couple of important points Mr. Salmon is missing in this article.

Here is my response: fault/



Posted by TFL | Report as abusive

This seems like a “Don’t Panic… Yet.” kind of moment. It seems like there’s still a lot of potential for the markets to freak out if, in fact, the debt ceiling gets breached for more than a matter of hours. If the crisis drags on, as we start to get close to Nov 1 (when a lot of bills come due at once), if Obama doesn’t take some kind of extraordinary measure (like “minting the coin”), it’s hard to even game out what traders might do. 3/hitting-debt-limit-when-treasury-will- run-out-money

Posted by Auros | Report as abusive

I know what the traders will do with the increased debt, they will collect insurance bets.

Posted by 2Borknot2B | Report as abusive

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