Yields on the Treasury's shortest-maturity obligations are getting locked in below zero as the U.S. moves to reduce issuance of bills to keep under the government's debt limit.
The Treasury said on Monday that it would sell US$15 billion of four-week bills Tuesday, down from $20 billion Sept. 15 and $45 billion in July. Wall Street strategists expected bill offerings to fall short of the amount maturing in coming weeks—meaning the government would be paying down debt—as the Treasury exhausts funding measures after reaching its statutory borrowing limit in March.
Yet the size of the reduction came as a surprise, given that quarter-end is approaching, when banks typically look to bolster balance sheets and step away from providing alternatives to bills, such as repurchase agreements. Current four-week bills have closed with negative yields since Sept. 16, the day before the Federal Reserve kept its overnight target near zero.
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The cut "is in line with the overall trend of the Treasury reducing bills sales given the debt-ceiling constraints," said Kenneth Silliman, head of U.S. short-term rates trading in New York at TD Securities, one of 22 primary dealers that trade with the Fed. "Given that we are heading into the quarter-end period when demand rises, this cut in bill supply couldn't come at a worse time."
The government will pay down about $135 billion in bills by Dec. 1, according to strategists at Citigroup Inc., who say the Treasury will bump up against the debt ceiling by then. The government's steps will allow it to cover all usual payments until mid-November or early December, unless Congress increases the debt limit, according to the Congressional Budget Office.
In May, the government announced plans to increase bill issuance to ease distortions in money markets given a dearth of short-term high-quality assets and heightened demand. Lawmakers have upended that effort, as Democrats and Republicans have yet to lift the borrowing limit or suspend it, as they did previously. A Treasury official said in August that bill sales might slow if Congress doesn't raise the debt limit.
Four-week bills' yields have dipped below zero on occasion since the recession. A negative yield means investors buying the bills will get back less at maturity than they paid at purchase. They're willing to take that loss to have a safe place to park their money.
Treasury auctions don't allow for negative yield bids, meaning the lowest permissible bid is zero. The department discussed at several of its quarterly refunding briefings in 2012 the potential benefits of allowing for negative-yield bidding at bill auctions.
The Treasury said in August 2012 that it was "in the process of building the operational capabilities to allow for negative-rate bidding in Treasury bill auctions, should we make the determination to allow such bidding in the future."
–With assistance from Wes Goodman in Singapore.
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