Flight to quality continues –

The flight to quality continues with further declines in Treasury bill rates. It is interesting to note that the very short-end of the yield curve has seen the biggest declines. There is significant steepening of the yield curve between one month and six months. This suggests that the flight to quality is focused on money fund investors. If it was a general flight to quality from holders of corporate bonds and equities, there would be a less steep decline in short-term yields. Non-money fund investors would be willing to take some maturity risk while looking for a cash asset.

This yield decline will continue until there is enough interest rate difference between credit products and Treasuries to induce investors to move out on out curve or out to the commercial paper market. At this time, the risks of a funding problem are still too large to induce a shift in funds to the CP market. Window dressing by money funds is paramount. Cash managers are being told to increase quality regardless of yields. Until investment committees are willing to take on more risk, we will see a CP funding crunch.

Expect to see some movement out of the very short-end of the curve as investors find longer maturity Treasuries more appealing, but the commercial paper crisis is far from over. The funding roll risk is real and will not go away with just a Fed announcement or one good day in the stock market.