Panic: 1 Month Bill Yield Explodes, Prices At 0.35% Highest Since Lehman
Tyler Durden on 10/08/2013 11:39 -0400
Moments ago, the just concluded 4 week Bill, with a Cusip which appropriately enough was BK, priced at a stunning 0.35%, blowing through the 0.295% When Issued, the highest yield since October 2009, the lowest Bid to Cover since March 2009, and the largest tail since March 25, 2008. The bond market panic is palpable, and just as we predicted would happen in a market gripped by sheer “Bernanke will kiss and make it all better” complacency.
Updated October 8, 2013, 12:42 p.m. ET
Default Worry Hammers Short-Term U.S. Debt
T-bill Yields Climb to Highest Since October 2008
CAROLYN CUI And KATY BURNE
Short-term U.S. debt prices tumbled again Tuesday amid rising investor concern about the prospect of a government-debt default, sending the yield on one-month U.S. Treasury bills to its highest level since the financial crisis.
With little sign that Republicans and Democrats will hammer out a compromise on the partial government shutdown, many in the financial markets are starting to worry about the prospect of a default.
Treasury bills maturing on Oct. 31—a date many market participants predict for the Treasury to run out of cash to pay its bills—sold off sharply Tuesday, driving their yields up to 0.35%, the highest level since October 2008.
Concern about the stalemate in Washington was also evident in Tuesday’s auction of new bills. The Treasury Department sold $30 billion worth of four-week bills maturing on Nov. 7 at a rate of 0.350%, the highest rate the government paid on such short-dated debt in five years.
Money-market funds and banks are typically the biggest buyers of Treasury bills, where they park their idle cash for a short time. But they shied away from the auction Tuesday. The bid-to-cover ratio, a gauge of investor demand, was 2.76, the lowest since July 2009 for four-week bills, according to Nomura Securities.
“It was an awful auction,” said Priya Misra, head of U.S. rates strategy research at Bank of America Merrill Lynch.
In another sign of weak demand, the “tail,” or the difference between the highest yield on the securities during the auction and the expected high yield when the auction starts, was as wide as 0.05 percentage points, the largest since March 25, 2008, according to Bank of America.
In the market for derivatives known as credit-default swaps, which some traders use to bet that a debt issuer will default, investors now are pricing in a 3% probability the U.S. won’t pay its obligations in timely fashion. Traders were asking Tuesday for €58,800 ($79,856) to insure €10 million of U.S. debt for a year, up 9.7% from Monday and up tenfold from Sept. 20 levels. U.S. credit-default swaps trade in euros to help users hedge the risk of a depreciating dollar in the event of a default.
The U.S. Treasury has said it will run out of emergency borrowing capacity around Oct. 17. By Oct. 31, the government could deplete all its available funds and face the risk of a default on bills or bonds that are due around month’s end, according to J.P. Morgan Securities LLC. Prices for bills maturing between mid-October and early November fell the most.
Some money managers said they sold these maturities to avoid potential losses or the operational difficulties of dealing with defaulted securities.
For now, investor concerns appear to be limited to these short-term securities. The yields of longer-term bills, those maturing in three, six and 12 months, remain near zero, and the yield on the 10-year note has been holding steady, settling at 2.634%.
U.S.-listed money-market funds saw a small outflow of $3.679 billion in the week ended Oct. 2, according to EPFR Global, a fund data provider.
“We’re still not seeing a great deal of concern among retail investors of the probability of a debt-ceiling incidence,” said Jake Lowery, portfolio manager with ING U.S. Investment Management. “While managers are trying to minimize their exposure to Treasury bills that are most likely to be impacted by any default, investors still believe T-bills are a safe-haven asset.”
The repurchase market, known as repo, where banks and other financial institutions get billions of dollars of short-term funding by borrowing and lending securities—often short-term Treasury debt—is beginning to show some stress.
It cost 0.09% to borrow cash overnight against short-term Treasury debt Tuesday, up from 0.05% in late September, according to the Depository Trust & Clearing Corporation.
Traders and banks are concerned that a Treasury default on its debt could mean they are pushed to pay a much higher rate to borrow against short-term Treasury securities, or they may simply refuse to lend cash against such securities, analysts say. U.S. government securities amount to about one-third of all the securities used to back up loans obtained in the repo market.
In 2008, concerns about borrowers’ ability to repay their debts froze the repo market as investors shied away from trading with certain financial institutions. This time around, the repo market is dealing with a more fundamental question: What’s the credit quality of the Treasury securities backing the loans?
Declines in the value of T-bills, considered one of the most risk-free assets in the world, will have a knock-on effect on other assets used to back loans in the repo market, Ms. Misra said.
“In the run-up to a default or following a default, there could be significant changes in pricing of equities, corporate bond and other securities,” said Alex Roever, head of U.S. rates strategy at J.P. Morgan Chase.
