Short-term rates at lows - investors need confidence boost

It is interesting that are supposed to be through the worst of the credit crisis, yet we saw negative interest rates for short-term 4 week Treasury bills in the middle of last week and current yields are at 1 bp. You always hate having to explain why rates go negative even if it is only for technical short-term reasons. Yu pay someone to take your money.

Clearly, there is end of quarter window dressing; nevertheless, this is a sign that the credit crisis is far from over. Money is not moving out to riskier assets with 90-day CP at 100 bps above Treasury rates. The spread between high quality CP and Treasuries are much wider than one would expect given all of the Fed action, but investors have not been willing to reach for these yields. The level of risk aversion is so high that even though investors are getting virtually nothing on their Treasury money market funds after fees, they will not move to other money market alternatives even with implicit principal protection from the government.

The Fed has pushed down the short-end of the curve as much as they believe possible so they are to willing to buy Treasuries with longer maturities, yet even here the curve is steep on a relative basis. For example, the differential between 2 and 5-year Treasuries is about the same as a year again even though we are deeper in a recession and have government buying.

Investors need a shot of confidence or at lest a reduction in uncertainty in the rules of the game before they move money to riskier assets.