The implied yield for three-month bills briefly traded at negative 0.01 per cent – the first time that has happened since 1940, traders said. At such a level, an investor is essentially paying someone to own the security.
The flight to safety helped the Treasury sell $30bn in four-week bills at a discount rate of zero per cent for the first time. That auction followed the sale of $27bn in three-month bills at a discount rate of 0.005 per cent on Monday.
Ted Wieseman, economist at Morgan Stanley, said that “demand for cash remained extreme” and described the result of the four-week sale as “absurd”.
Investors have placed $100bn in institutional money market funds in the last month, boosting demand for Treasury bills. The scramble for government debt also reflects end-of-the-year “window dressing” by fund managers who try to send a reassuring signal to investors by holding large amounts of safe-haven assets such at Treasury bills when they publish their accounts.
“Some funds have guidelines that require them to own Treasuries,” said Jay Mueller, portfolio manager at Wells Capital Management.
The implied yield for four-week bills briefly traded at negative levels in October after a prominent money market fund lost money as a result of the bankruptcy of Lehman Brothers.
Bills have been trading well below 1 per cent in recent weeks, and even the Federal Reserve’s overnight rate has slipped close to zero per cent. On Tuesday, the effective Fed funds rate was quoted at 1/16th, or 0.0625 per cent, below its target rate of 1 per cent.
In Tuesday’s action, demand for the new four-week bill was 4.2 times the supply, well above the average of 2.87 times in the previous nine weekly sales. Non-dealers bought nearly half of the issue. Demand was also strong at 3.3 times for this week’s sale of three-month bills.