The Zero Yield Economy
We mentioned this yesterday as it happened, but Treasuries traded down to previously unseen yields. The 3 month T-bill went negative yield for the first time ever.
At auction, Treasury sold $27 billion of three-month bills at a discount rate of 0.005%. This is the lowest yield since it starting auctioning the securities in 1929.
Just as astounding, the U.S. sold $30 billion of four-week T-bills, at zero percent for the first time ever (4 week treasuries have been around only since 2001).
A quick para:
When was the last time you invested in something that you knew wouldn’t make money?
In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.
The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.
While this will lower the cost of borrowing for the United States government, economists worry that a widespread hunkering-down could have broader implications that could slow an economic recovery. If investors remain reluctant to put money into stocks and corporate bonds, that could choke off funds that businesses need to keep financing their day-to-day operations.
Investors accepted the zero percent rate in the government’s auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.
In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.
Quite remarkable.
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Sources:
Investors Buy U.S. Debt at Zero Yield
VIKAS BAJAJ and MICHAEL M. GRYNBAUM
NYT, December 9, 2008
http://www.nytimes.com/2008/12/10/business/10markets.html
Treasury Bills Trade at Negative Rates as Haven Demand Surges
Daniel Kruger and Cordell Eddings
Bloomberg Dec. 9 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOGXsWKEI6F4&
December 10th, 2008 at 7:00 am
And the record keeping goes all the way back to 1929. Scary indeed to find today’s climate of fear is even worse than the 1930’s as indicated by T-Bill yields. All the while remembering that the 30’s had 10,000 banks closing, 25% unemployment, Hitler, Mussolini and Stalin running around, the Dust Bowl with the hottest temperatures ever recorded, a civil was in Spain, Japan going nuts and stocks down 85%.
Yup, screaming fire in a movie theatre by Paulson/Bernanke and all the other interventionists still works. Good job everyone.
December 10th, 2008 at 7:21 am
The thing is, we have deflation right, inflation is non existent. So with 0% inflation, the spread to treasuries is kinda normal. Look at 10YR when it was 4.5% and inflation was running at 2%. So the spread was 250 basis points or so.
Now inflation is likely close to zirp. The spread remains about the same. When the fed monetizes the debt and all that printing enters the system, is when we will likely see gold do its thing, dollar dome back, etc.. I think the treasury bubble has more to inflate though before busting.
December 10th, 2008 at 7:51 am
Our new theme song…if you look closely you will see Ben and Hank way off on the left
http://www.youtube.com/watch?v=aNaKWXqXkhw
December 10th, 2008 at 7:55 am
I do like a spot of panic, though, it makes for great trades the other way.
@ urban: have you looked at oil this morning? the inflation numbers are completely dominated by oil import prices as we will see again tomorrow and friday. Not sure about you but I am not paying any less for things I need.
Treasury buyers may find their mattress catching fire and asphyxiating them when the fire starts in the theatre.
December 10th, 2008 at 8:20 am
Barry, did you notice that AIG dropped another turd this morning?
$10 B in bad trades. Nice going, boys.
December 10th, 2008 at 8:26 am
Zero isn’t zero if there is deflation.
The lucky schemers who were gifted with ‘bailout’ money have realized that they may have to pay it back in more expensive dollars and have also found there is nobody to lend it to who can be certain to return it to them plus interest. Hence: park it in Treasuries, thus rope-a-doping the bailout plans and the money-printing scheme.
Thus far, Bernanke’s intent and actions have been a complete failure. About Paulson, I’m a bit more cynical – his plans have worked, I think. They just aren’t what people thought they were.
December 10th, 2008 at 8:27 am
We know that most Boomers have not saved enough.
With Zirp, our leaders are making sure Boomers don’t and can’t save. We are essentially guaranteed that Government will be paying for Boomers retirement.
December 10th, 2008 at 8:36 am
Left when the market isn’t going higher everyday it really shows how little skills these money managers actually have.
December 10th, 2008 at 8:40 am
For a while, the price of things you don’t need will be going down. But thanks to just-in-time-inventory, those will dwindle fast. Then a load of companies will fail, reducing capacity. Prices will go up or they won’t be offered.
Houses will keep on getting cheaper but for those who are staying put, mortgage rates will increase (credit spreads) so the majority of homeowners (those who took short term loans) will be paying more interest.
140$ oil and high commodity prices never really made it to the cost structure… China was subsidizing the oil. Didn’t you notice that the price of some purchased stuff with metal didn’t even cover the price of the metal in it? Even less the shipping costs? So our cost structure might still be at 30-40$ oil. With oil at 40$, anything above would mean inflation.
Food might go down because of excess grain but that would be for a year maybe. In the great depression it didn’t stop them from dumping excess grain in the ocean to keep prices up… Who knows what our leaders might decide!
When the Fed has finished propping up companies it will turn to households and send cheques (unemployment, SS for thousands of Boomers who decide to retire, cheques for families with kids, cheques for the elderly… that’s when the inflation is going to kick in… at exactly the same time inventories dwindle and capacity shrinks.
That’s my forecast.
December 10th, 2008 at 9:22 am
I was watching the news yesterday and in came an ad for a Toyota Camry selling for 14K. In Canada such a car is around 30K if not more. In fact cars in Canada are much more expensive than in the US and much everything else also.
I can’t help but think that it’s really the US that is due for a drastic cost of living adjustment. 30 years of dollar overvaluation , big time.
December 10th, 2008 at 9:28 am
“Turning Japanese”
December 10th, 2008 at 11:04 am
I’ve been trying to understand what it means to have the US government ‘give’ money to financial corporations, borrowing massively in order to do so, and then have those same financial corporations use that money to buy up the US Treasuries created in order to fund them. I’m afraid I still have no idea what that means even. But since the banks hold the T-bills, that turns them into creditors (well, in this trade), and since the ‘country’ (whatever that is) has to pay the interest, that would seem to make them debtors. So, if I get this right, anyone who pays taxes is now ‘in debt’ to the banks. Whereas, just yesterday, the banks had no cash flow on their bad loans (made by their own free will), now they have an entire geopolitical structural unit paying them, and whole bureacracies paid for by the debtors directly (IRS) to enforce payments. Not bad work for a bunch of con-artists. Anybody who ever claimed the right wing was ‘incompetent’… maybe it’s time to wake up and smell the cofee.
December 10th, 2008 at 11:23 am
Bruce,
I think it is this one: http://www.youtube.com/watch?v=r_LuNbSIbGQ&feature=related
December 10th, 2008 at 11:50 am
Winston:
Hoo, boy is that a downer of a video…how can you shake your money maker to that?
(Assumes money making is still possible in 2009)..
December 10th, 2008 at 12:02 pm
danm: Interesting about prices in Canada vs. U.S. My husband is working a long-term project in Canada; he told me that the wine we buy at Kroger for $10 a bottle costs $30 there.
December 10th, 2008 at 12:04 pm
it reflects the reality of credit rationing and asset deflation moving through the world economies. Having a rear view mirror of the economy can be dangerous to your economic well being.
December 10th, 2008 at 12:36 pm
“Quite remarkable.”
This story begs for more commentary than that. I can understand not wanting to be as incendiary as Denninger, but I think this is a watershed event. Perhaps we have just had so many of them as of recent, that we get information overload.
This does not bode well at all for the credit markets I would think. Not only are investors unable to find any safe investments that would generate a positive rate of return, they don’t even trust leaving it in a bank.
December 10th, 2008 at 1:19 pm
I know capital ratios for firms apply discounts depending on the type of asset held. Government debt carries the lowest discount, so this may explain part of the extraordinary demand.
December 10th, 2008 at 1:35 pm
I can’t believe they still think they should get bonuses. Anyone in the financial industry talking about bonuses should be shown a nice shiny 8×10 cell along with the new pair af bracelets and the key, which will be given to them as a bonus after they figure out how to fix the mess they made. Additionaly their assets should be frozen and their property confiscated. Heck send em to Gitmo for a little R&R in a nice tropical clime.
December 10th, 2008 at 1:47 pm
So if investors are so scared that they have grossly mispriced the risk of US government debt vs private company debt, and banks have gotten so scared that they fail to fulfill their job of providing loans to private businesses, is it time for the government to step in. Market forces have always been an inefficient and wastefull way to provide critical services to society. Now that they have completely stopped working, there seem to be no other choice than to let government step in, temporarely. If need be issue trillions of government bonds at low interest rate to these scared investors, and use the proceeds to purchase company bonds of similar length. Harvest the spread of 2-500 base points and use that profit to cover any losses. I mean you got to keep the economy going even when capitalism shows the worst sides of its dysfunction. Or is capitalism so important that we will sacrifice our economy to prevent admitting that it has its limitations?
December 10th, 2008 at 6:36 pm
If Treasuries are paying 0% why aren’t those flocking to them not just staying in cash? Because looming in the distance is the hit the dollar is going to take.
December 10th, 2008 at 9:36 pm
Pat G. are you telling us the UST-Bills are Not U$D proxies?
December 11th, 2008 at 6:42 am
DeDude: What country are you referring to that is Capitalist? You can’t mean the United States with its Socialist Political Economy that found its roots with the inept but eloquent FDR, do you?
This country hasn’t been allowed to function as a Capitalist economy so the proof that it has failed to deliver ’social services’ is baloney. It is the ’socialist economy’ that the US has been practicing that has proven a failure.
I’d be delighted to debate you on the merits of Capitalism but let’s first agree that it has not been practiced anywhere since 1933.
December 11th, 2008 at 12:50 pm
I was told that the only thing kapitalism had going for it was its much better economic growth rate, making its godless hamering of the poor and sick acceptable if you don’t give a s**t about what the bible teaches us. But if we have had socialism since 1933 and the US in the period 1933 – 2000 clearly had the best economy the world has ever seen, then I guess socialism is the way to go. We just have to make sure that it is not these half-brained, half-committed, dumb a$$ GOP’ers that are running our socialism, since they obviously can’t handle it.
Welcome to the socialist party comrade flipspiceland.