Tuesday, November 24, 2009

Negative T-bill rates - bad sign

There is window dressing at the end of the year and many institutions want to clean-up their balance sheet before the end of the year. Central banks are still buying Treasury bills with their dollars. It should not be surprising to see rates fall at this time of year, but to go negative?

The demand for short-term instruments is so strong that investors will pay the government to take their money. We know the Fed wants to push real rates negative so that money will move out the curve and have creditors borrow. They have been doing that in the corporate bond market with more than $1 trillion issued this year. However, a negative nominal rate is reflecting a conservatism that should not be expected in a recovery. Of course, this could all be technical, but it would seem odd that rate levels will get negative.

The fixed income markets are telling us that they are expecting some bad things to happen to the economy. Money should moving out to high quality commercial paper and LIBOR based investments. It is not. Money should be moving to equities. It has slowed. The surprising event is that spreads have not widened at this time. 30-day commercial paper has actually tightened during this period. Spreads between T-bills and commercial paper has stayed stable. Some of the Fed programs will be rolling off in February which may be related, but there is nothing good about having negative nominal rates in the economy. Even if this is just technical it creates a level of uncertainty that should not bee present. The government should have increased supply to insure that rates were positive.

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