In case you missed it, treasury bill yields went negative yesterday (to -0.03%) which means investors were willing to lose money in order to own them. This is a very rare occurrence.
Even simply keeping cash under your pillow would earn a higher return, in either an inflationary or deflationary environment. So negative yields, no matter how small, clearly don’t make any investment sense.
When this happened back during the end of last year, Post-Lehman, one potential reason was that institutional investors were so panicked that they simply wanted to protect the value of their capital as much as possible. The only way to do that within their scope of options was to buy U.S. treasury bills, even if they had to accept a small negative return.
Yet investors certainly aren’t as panicked as they were last year. So what’s going on this time?
The FT (via FTAlphaville) ‘The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors – a practice known as “window dressing” on Wall Street, analysts said.’
Across The Curve: Typically as the year end approaches clients tend to unwind profitable trades and reduce balance sheet. I think that some of that deleveraging process has created new piles of cash and that money needs a place to park.
Others are preparing to beautify their balance sheet by having some pristine government paper on the books over year end. Some of that trade has begun as investors purchase paper which will carry them into 2010.
Thus this time around it appears there is simply too much money that wants to sit tight and look respectable come year-end. Which means that we shouldn’t read too much from the negative T-Bill yield and this will eventually rebound back to at least 0%, once the year-end regulatory dance comes to an end.