The un-terrifying Treasury bill market
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.
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:
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.