14 ms·

Yield of 0% a First at 3-Month Treasury-Bill Sale

79 points by 6502nerdface 11y ago

ghshephard 11y ago
Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore.
- MCRed 11y ago
  I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. For years now people have been alleging that the Fed via the FOMC and other mechanisms has been propping up the treasury market by buying them directly... an effective strategy to keep interest rates low, which will work really well... until it doesn't. When the market signals are distorted to such a degree, the damage to the economy is cumulative. It may not cause an impact now, but it will eventually. This is a lot like the causes of the housing bubble (which were in part due to artificially low interest rates.) Quantitative easing is economic heroin... it makes things feel great for awhile, but the price to be paid on the downside gets heavier every year. We should have let the banks fail, and the economy work out the repercussions and get healthy.
  - littletimmy 11y ago
    Where else would you keep your money though? You could hold cash in a bank, but the risk of the bank defaulting on it's custody assets is more than the risk of government default. This is probably a really good time to invest in developing world junk bonds.
    - hga 11y ago
      Exactly. We're getting a tremendous ... benefit, of a sort, by being the least worst place to put your money.
      - 6stringmerc 11y ago
        I worked for a muni-focused Wall St. firm shortly after the crash of 2008, during some of the peak flight to quality years in recent memory. My sole comfort about the ridiculous risk and crash that happened in the US was that somehow the interconnected system brought down the whole world as well (ex: the German landesbanks and bundesbanks). I say comfort, but I mean it's hard to put a label on such a conception.
    - brianmc21 11y ago
      developed or developing? Developing is a risky bet. Commodities are down across the board and most of these developing nations depend on them for revenue. Also the bonds either has to be in USD or you could get screwed due to the strength of the dollar. FYI bank deposits are insured by the FDIC up to 250k.
    - cryoshon 11y ago
      Credit union. Or, literally any bank that doesn't gamble with the money you give to it. This is much harder to find since the corporate lobbyists gutted Glass-Steagall, but they still exist.
      - positr0n 11y ago
        Don't credit unions still use your deposit as backing for mortgages, auto loans, etc? A run could still happen on a credit union.
        afarrell 11y ago
        My credit union has loaned me money, so they were in fact gambling that I would pay it back.
      - JamesBarney 11y ago
        I would assume that credit unions are a high default risk than the treasury.
      - jonknee 11y ago
        This isn't for your spare change, if you need to stash billions of dollars you're not walking down to the local credit union and signing up for an account.
        6stringmerc 11y ago
        Yes but Glass-Steagall kind of principles are the ones that are continually being lobbied and chipped away at to increase the capacity for risk in the financial markets. See: Trying to treat municipal bonds as high quality liquid assets (vs. illiquid for holding purposes).
      - eldavido 11y ago
        Investment is just a nice word for gambling; there's always risk. I agree that there are required levels of prudence in banking and investment management more generally, but don't pretend there's a well-defined brightline between "gambling", "speculation" and "investment".
  - eldavido 11y ago
    It's not that simple. Keep in mind that "wealth" as such can't be stored, it has to be invested/put into something; the market's assessment is that the liquidity, safety, and convenience of treasury debt is a desirable combination to house a few billion of wealth. As an alternative to buying treasuries, you could use a bank, but keep in mind that FDIC only covers accounts up to $250k and beyond that, you're exposed to the bank's credit risk, admittedly small, but a very large concern for an individual/company with millions in cash. Banks don't work the same way for big accounts as small ones, you actually have to weigh things like "will my money be available" and "will the bank default". If the situation gets bad enough, people will start warehousing cash in bunkers, but that's expensive and I highly doubt it could be done for less than 0.05%/year or whatever slightly negative rate the yield is on these things. Banks provide a valuable service by offering depository safekeeping of funds. If we stay in this zero-interest environment much longer, expect to see more fees on checking accounts as net interest margin (what the banks earn between their borrowing costs and their lending prices) continues to fall.
    - codyb 11y ago
      Interesting note on storing cash in "bunkers", according to Wikipedia [0] (referenced to a book "The Accountant's Story"), Escobar and crew used to have to write off 10% of their money stored in warehouses because rats would actually come and nibble away at the bills. Unfathomable to me having so much money that you need literal warehouses for it, but even more amazing is that there was no alternative besides a 10% year over year loss on your stored capital. When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats. So, in retrospect, if you can do it legally, the Fed's bills seem like a great deal compared to stockpiling cash. And I'm sure you're paying far less to secure those, although I'm not exactly sure how these treasuries work and if you could just purchase one worth $22Bn and put it in a safe somewhere. Seems like it'd be just about impossible to steal something like that and pass it off as your own. [0] - https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accountant-8 https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accoun...
      - AnimalMuppet 11y ago
  - JamesBarney 11y ago
    It's hard to imagine a situation where the Treasury defaults and U.S. dollars are worth anything. In a situation where the treasury defaults your best investment is probably guns and food. If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank. Any bank has higher default percentage than the treasury. I'm not sure what is distorted or artificial about what the FED does. They try to stabilize the growth of the money supply so that we have near constant inflation, and full unemployment. If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.
    - eldavido 11y ago
      Incidentally, I think this is the biggest reason bitcoin is going to fail. The demand for money changes, so you either have to pick between a fixed supply, in which case prices will oscillate wildly, or a supply managed by some kind of central authority, that results in an unstable amount of currency but stable prices. I just don't see a currency working as a unit of account or store of wealth with such oscillation in value. Maybe as a medium of exchange, but then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.
      - michaelcullina 11y ago
        Both elements of your comment are highly astute.
      - aianus 11y ago
        > then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges. Bitcoin is already cheaper as a medium of exchange than credit cards and pretty much all international remittance providers. Coinbase Exchange has a $0.01-$0.02 spread and charges 0.25% for removing liquidity. Stripe costs 3% + $0.30 and Western Union / Wire Transfers are multiples of that. Disclosure: I work for Coinbase
  - jonknee 11y ago
    Where would you put the money? In Europe they're actually paying for the privilege of buying short term bonds... There is more money out there than places to invest it.
  - dragonwriter 11y ago
    > I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. If the Treasury default risk is smaller than the alternative expected costs for alternative storage of the same dollars (either bank failure risk or, for instance, cost to store and risk of loss of physical bills), then there can be an advantage to 0-interest treasury securities. There is no risk and cost free way to store dollars.
    - raverbashing 11y ago
      What is the typical custody cost of treasuries?
      - eldavido 11y ago
        I don't know exact figures but the treasury security market is widely considered the most liquid market for anything, anywhere, ever (apart from perhaps physical notes in your wallet) so I can't imagine it would be large at all.
  - mywittyname 11y ago
    I can help you out here: treasuries are more secure than cash holdings, yet are just as liquid. Institutional investors sometimes feel that it's better to hold cash than stocks/bonds at certain periods. Right now, Berkshire Hathaway is holding billions in t-bonds because there are no good investments to make. For individuals, treasuries offer better yields than CDs and treasurydirect.gov makes it very easy to buy and sell them.
- dragonwriter 11y ago
  > Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore. The fact that the most recent sale of bills was at 0% doesn't actually mean that there is no risk of the government defaulting on existing debt. Because the cost of borrowing is so low, one might think it should mean that, but the nature of the legal rules -- particularly, the debt ceiling -- means that a politically-driven default with no need is still a real possibility.
  - narrator 11y ago
    The fed will conduct as many permanent open market operations ,i.e, electronically printing money, as necessary to keep a default from happening. The risk of a default is purely theoretical. The only serious risk is that the dollar exchange rate will start to rapidly deteriorate.
    - guelo 11y ago
      The fed has no control over the debt ceiling. A voluntary political default will always be a possibility as long as tea partiers are at the helm.
      - masterleep 11y ago
        Preventing the government from going into additional debt is approximately the opposite of a default.
        dragontamer 11y ago
        Government needs to borrow money every week or so to avoid default. That's how the current system works, and anyone who doesn't understand this basic issue needs to stay out of the credit ceiling debate. I'm willing to listen to anyone who thinks they have a solution for getting us out of this "rolling debt" system, but unless you can solve both problems simultaneously, it will be better to just raise the debt ceiling and then start fixing the issue.
- nostromo 11y ago
  The biggest buyers of US Treasuries (Social Security, The Fed, and the federal government) would buy them at any price. It's a strange market given that the federal government is on both sides of the equation.
  - davvid 11y ago
    Not quite.. The Fed != The Federal Government. It's more like.. The Fed is issuing debt, and we (American taxpayers) are (the suckers) on the other side of the equation.
    - neffy 11y ago
      Actually, the Fed typically runs at a profit and pays it into the US Treasury. http://www.federalreserve.gov/newsevents/press/other/20150109a.htm http://www.federalreserve.gov/newsevents/press/other/2015010...
      - fiatmoney 11y ago
        They "run at a profit" because they make "interest income on ... U.S. Treasury securities...". I.e., they are paying the Treasury with money they received from the Treasury, or from bonds guaranteed by the Treasury.
  - icu 11y ago
    The Fed is a private bank and is in no way 'part' of the US government. However it has been granted the incredible monopoly of issuing debt to the US Government and essentially enslaving the American taxpayer to perpetual debt. The bank presents itself as part of the US government to the public and many make the mistake of thinking that it is. The only perview the US government has over the Fed is a presidential appointee in the form of the Chairman. Try doing a freedom of information request on the Fed and you will be refused on the basis that it is not a federal agency! Hardly what I would call full transparency and accountability. Today's Fed didn't just come about. Several times over history bankers used their power and influence to create this system but faced opposition from great patriot politicians. Consider this quote: “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809) Another example is President Andrew Jackson, who considered 'killing' the 2nd Bank of the US (an earlier type of the Federal Reserve System) his most important legacy. And finally, Woodrow Wilson the man who damned us all by signing the 1913 Federal Reserve Act, a few years later wrote: “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
- justincormack 11y ago
  Doesnt make much difference with T-bills. They dont pay interest per se, they just have a single maturity payment, you buy at a discount, or in this case no discount. Also governments rarely default on bills (1 year or less maturity) only on longer dated bonds (over a year), for slightly unclear reasons.
PaulHoule 11y ago
Man, if we could ever get over this allergy into investing in broadband infrastructure, we might create enough investment demand to get interest rates heading up.
dageshi 11y ago
This seems... odd. I don't really understand the way auctions work vs the wider market to understand if this is just a fluke in the selling process, but I wonder if someone somewhere is panicing about something and getting into short term debt?
- MCRed 11y ago
  There would be no real advantage to this short term debt at %0, even if you're panicking, because you're trading dollars for dollars. EG if you're panicking about the value of the dollar, buying treasury with those dollars that only returns the same number of dollars is no advantage. What this does indicate is that the fed is buying treasuries directly to keep interest rates low. They don't care about return, but are simply going to provide enough demand to keep all treasuries the government wants to issue snapped up... so interest rates don't rise. I doubt they meant to hit %0, and probably just over bought a bit.
  - dageshi 11y ago
    There certainly is an advantage if you're worried about the stability of the financial system. Banks can fail, corporations can fail, if the US government fails to repay then things are probably so bad you're probably already dead... If you're worried about getting repaid or you're desperate to get your cash out of whatever it's currently in and into something safe and liquid then short term treasuries are probably your answer. But like I said I don't know if that applies to auctions like this, auctions are not the same as the general market so it may just be a fluke.
  - jhulla 11y ago
    There is absolutely an advantage. FDIC insurance limits are $250K. Anymore and you take on a (non-zero) risk of the bank defaulting. Parking cash with US Treasury is substantially safer.
    - icebraining 11y ago
      If the US Treasury were to default, how likely would the FDIC to default as well? After all, part of their funds is itself in the form of Treasury securities.
kingnothing 11y ago
Serious question: why would anyone buy a 0% T-Bill over keeping cash in a bank account?
- jsprogrammer 11y ago
  You have more money in banks than you have insured? You trust the credit of US government more than any bank?
  - samclearman 11y ago
    Given that a US default would likely cause the collapse of the US financial system and possibly the entire world's financial system, it makes perfect sense to trust the US government's credit over that of any bank.
    - jonknee 11y ago
      And the US Government has a big advantage over banks--they can print more USD.
      - jsprogrammer 11y ago
        Banks can 'print' more USD so long as they find a counter-party.
        jonknee 11y ago
        If you own the bonds you are the counter party.
- masklinn 11y ago
  Safety guarantees, or deflation expectations. A few years ago France issued (slightly) negative-yield short-term bonds[0] and earlier in the year germany issued pretty seriously negative yield (0.08%) 5 years bonds[1] [0] http://finance.yahoo.com/news/france-sells-bonds-negative-interest-rate-144603419--finance.html http://finance.yahoo.com/news/france-sells-bonds-negative-in... [1] http://money.cnn.com/2015/02/25/investing/germany-negative-bond-yield/index.html http://money.cnn.com/2015/02/25/investing/germany-negative-b...
akg_67 11y ago
Are we going into deflation? If the 3-month treasury bill sold at 0% means investors are expecting to have no inflation or potential deflation in next 3 months.
- AnimalMuppet 11y ago
  Or that they see a lot of danger in other places in the next three months, and are willing to pay three months worth of inflation as an insurance policy.
- jonknee 11y ago
  Or the other places to put your money are more risky.
SeoxyS 11y ago
The Swiss Government has been selling 10-year notes at a negative yield of -0.055%. People are willing to pay Switzerland to store their money. http://www.wsj.com/articles/switzerland-first-with-10-year-bond-at-negative-yield-1428489209 http://www.wsj.com/articles/switzerland-first-with-10-year-b...
- jonknee 11y ago
  The amazing part of that isn't the negative rate, it's the term. Paying for safety makes sense, but paying for safety for ten years is impressive.
  - AnimalMuppet 11y ago
    Depends on (peoples' perception of) how hard it is to cash out in the meantime.
- tcbawo 11y ago
  This is actually a currency trade. Switzerland was forced to devalue against the Euro once. It may happen again.
herge 11y ago
When we talk about 250k in bank accounts being insured by the FDIC, what does that mean? If a bank went bankrupt, how fast would it take for me to get my 250k back from the government?
- dsr_ 11y ago
  https://www.fdic.gov/consumers/banking/facts/payment.html https://www.fdic.gov/consumers/banking/facts/payment.html says "When there is no open bank acquirer for the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing."
  - deleted 11y ago
    [deleted]
- dragonwriter 11y ago
  > If a bank went bankrupt, how fast would it take for me to get my 250k back from the government? The FDIC's target is two business days from the failure of the bank. [0] IIRC, though, most actual bank failures have resulted in a different FDIC-insured bank taking over all or virtually all deposits, so while bank failures happen all the time, FDIC insurance payouts rarely need to occur. [0] https://www.fdic.gov/consumers/banking/facts/payment.html https://www.fdic.gov/consumers/banking/facts/payment.html
  - toomuchtodo 11y ago
    If you're interested, there's an unofficial "problem bank list". Its unofficial because the FDIC doesn't want to create a run on a problem bank. http://problembanklist.com/problem-bank-list/ http://problembanklist.com/problem-bank-list/
- mywittyname 11y ago
  It's transparent; bank failures happen all the time and account holders rarely notice. The FDIC can broker a transfer of assets from a failed bank to a buyer over a weekend.
afarrell 11y ago
At the risk of sounding fantastically ignorant... If the US decided to reduce its fiscal deficit, wouldn't that take short-term T-bills out of circulation and drive down interest rates further?
- mywittyname 11y ago
  It's no an ignorant question at all, but this has happened before. In the late 90s the US government was projected by be debt-free by like 2003 and the prospect caused panic in the financial industry and the government reverse course and proceeded to run a deficit again. So short-term, it would not affect rates, but long term budget surpluses are worrisome.
  - AnimalMuppet 11y ago
    Um, no, that is not at all why the government reversed course. They did, but that's not why. (Why did they really? Because Republicans in Congress were fine with not letting a Democratic president spend money, but once they got a Republican president, they were unwilling to hold his feet to the fire.) To the parent's question: If such were to happen, they're at least as likely to pay back longer-term debt.
  - peter303 11y ago
    It would have taken to late 2020s for all the 30-years to mature. They did stop selling 30-years for short while around the turn of the century. But I dont know if for this reason.
    - AnimalMuppet 11y ago
      If I recall correctly, yes, it was for this reason.
guelo 11y ago
The wasted opportunity of the government not investing this free money into the economy's infrastructure is infuriating.
- AnimalMuppet 11y ago
  This isn't free money. The interest is free. The principle still needs repayment. The government could in fact profitably invest a bunch of money in infrastructure. The problem is that the government invests, not where investment is needed, but instead where Congress politically decides to invest money. The results tend to be... sub-optimal. Is this a good opportunity for the government to invest in needed infrastructure? Yes, definitely. Is it a good opportunity for Congress to decide to spend a bunch more money? Not in my book.
  - saalweachter 11y ago
    A 0% nominal interest rate combined with a positive inflation rate is a negative real interest rate. Money borrowed at a negative real rate isn't free, of course, but it is on sale. If we have a billion dollar project that needs to be done, you could save ~five million by spending the money today and paying for it three months from now.
    - guelo 11y ago
      There's also the return on investment of the new infrastructure.
  - JoeAltmaier 11y ago
    Who would buy these? Isn't it riskier than, say, burying your cash in a mason jar in the back yard?
- fixxer 11y ago
  That would potentially do more harm than good. Crowding out private investment is bad and government contractors aren't exactly efficient. Government isn't going to boost the economy at this point, unless you're advocating WWIII.
roymurdock 11y ago
Let me try to reason out what is going on. On the one hand there we see very strong demand for safe assets: Short term treasury bills are safe because a) risk increases w/ time period and b) they are backed by the US gov't which has a great credit rating and a decent economy to keep it solvent. Investors are willing to take moderate losses (-0.02%) on 3-month T-bills on the secondary market. They are literally paying the government for the reassurance that they will get 99.98% of their money back in 3 months. On the other hand, we are seeing very strong demand for risky assets: S&P 500 was at 2,120 in July, and has lost ~120 points since then but is still 400 points above it's pre-recession 2007 high of 1,560. "Some money managers say the global monetary-policy backdrop is supportive of riskier assets, many of which have become attractive after a selloff in the third quarter." It seems like the supply of money is much too high, and there is not enough demand (viable short-term investments) to soak up the supply. Perhaps if our economy was not so short-term greedy and consumption-driven, we would not be so worried about a few years of necessary savings and long-term investment which would lead to non/negative ROI in the short term, but long-term growth if done correctly. The funny thing is that both the US stock market and the US government bond market, while on opposite sides of the risk spectrum, are both powered by the same engine: the US economy -> US corporations -> US employees -> US education/nutrition/social services/infrastructure/defense. If this engine sputters, all investors will be in a world of pain - bond holders less so, unless the entire system collapses and their bonds become worthless. As the article states, investors are basically giving the government short-term loans when they purchase these T-bills. They have faith that the government will be able to earn some return on them (usually below corporate returns, and hence lower than stock-market interest rates), but that the government has some plan to generate returns nonetheless. So the government should be taking these loans and pumping them into the economy in the way that free market capitalism can't - long-term investments in the basic infrastructure of society. Instead the government continues to keep the liquidity taps open through QE as central banks around the world forge onward with massive asset purchases, putting more money into the corporate market while rotting government balance sheets. Summary: It's like the public and private sector are playing hot potato with an increasing number of hot potatoes. The private market does not want to forego short-term profits and is expecting the government to make the proper investments to spur growth. The government has its hands tied with social security, medicare, and defense spending as well as the debt ceiling, and is pumping money out to the banks with the hope that they will fund long-term investment. They keep going back and forth, swapping more and more money, but the only thing that happens is the distortion of free market prices and signals.
nabla9 11y ago
5-Year, 5-Year Forward Inflation Expectation Rate and 3-Month Treasury Bill: Secondary Market Rate https://research.stlouisfed.org/fred2/graph/?g=2318 https://research.stlouisfed.org/fred2/graph/?g=2318 5-Year Breakeven Inflation Rate https://research.stlouisfed.org/fred2/series/T5YIE https://research.stlouisfed.org/fred2/series/T5YIE 10-Year Breakeven Inflation Rate https://research.stlouisfed.org/fred2/series/T10YIE https://research.stlouisfed.org/fred2/series/T10YIE
steveeq1 11y ago
Ok, someone educate me on this. Isn't a yield of 0% basically "free money"? What's to stop a bank from just "borrowing" trillions or even zillions?
- klodolph 11y ago
  The US government is the one borrowing the money, not the bank. The rates are set by the market at an auction. From the investor's perspective, you are basically exchanging cash now for cash later, at a 1:1 rate. As for "why don't they borrow trillions"? Well, they do borrow trillions, because the market will buy trillions of dollars in US treasury bonds.
- dragonwriter 11y ago
  > Isn't a yield of 0% basically "free money"? Yes. > What's to stop a bank from just "borrowing" trillions or even zillions? The yield is on Treasury bills -- that is, US government debt. What's to stop a bank from borrowing anything at that rate is that the market doesn't see banks as safe enough to give them that kind of rate; the US government is a different story. What limits the government's ability to borrow is that the rate is set based on the market-clearing price; if the government tried to issue more debt, that would increase the overall interest rate it would have to pay. (You can look at that as "raising" the price if it tries to "buy" more money, or "lowering" the price if it tries to "sell" more claims for future payment; but it works out the same either way.)
- jldugger 11y ago
  It's an auction run by the Fed, for the Fed. The US Fed asks 'everyone line up in order of willingness to give us cheap interest rates for 3 months.' They then walk down the line, borrowing money from everyone till the borrow the amount they wanted, and agree to pay everyone interest at the rate the last person they borrowed from was asking for. In this case, enough people bid zero that all lenders are getting zero. Banks don't get this zero percent rate. And the government itself can't get a zero percent rate for unlimited amounts, even if the debt ceiling weren't a thing; eventually the Fed's line up of lenders runs out of people willing to lend at zero percent interest.
jhallenworld 11y ago
And yet there is no inflation: http://www.multpl.com/inflation/table http://www.multpl.com/inflation/table (no doubt helped by the low cost of labor and oil). I guess people can't figure out how to make money from these zero-interest loans. As someone with a mortgage, I would really like to see some inflation (well, wage inflation anyway).
acd 11y ago
Demographics affects yelds on bonds, interest rates and housing prices. Demographics has had a downward trend on the interest rate but that is about to change as there will be a shortage of labour. It´s summarized in this article http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11882915/Deflation-supercyle-is-over-as-world-runs-out-of-workers.html http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...

79 points by 6502nerdface 11y ago

Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore.

MCRed 11y ago
I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. For years now people have been alleging that the Fed via the FOMC and other mechanisms has been propping up the treasury market by buying them directly... an effective strategy to keep interest rates low, which will work really well... until it doesn't. When the market signals are distorted to such a degree, the damage to the economy is cumulative. It may not cause an impact now, but it will eventually. This is a lot like the causes of the housing bubble (which were in part due to artificially low interest rates.) Quantitative easing is economic heroin... it makes things feel great for awhile, but the price to be paid on the downside gets heavier every year. We should have let the banks fail, and the economy work out the repercussions and get healthy.
- littletimmy 11y ago
  Where else would you keep your money though? You could hold cash in a bank, but the risk of the bank defaulting on it's custody assets is more than the risk of government default. This is probably a really good time to invest in developing world junk bonds.
  - hga 11y ago
    Exactly. We're getting a tremendous ... benefit, of a sort, by being the least worst place to put your money.
    - 6stringmerc 11y ago
      I worked for a muni-focused Wall St. firm shortly after the crash of 2008, during some of the peak flight to quality years in recent memory. My sole comfort about the ridiculous risk and crash that happened in the US was that somehow the interconnected system brought down the whole world as well (ex: the German landesbanks and bundesbanks). I say comfort, but I mean it's hard to put a label on such a conception.
  - brianmc21 11y ago
    developed or developing? Developing is a risky bet. Commodities are down across the board and most of these developing nations depend on them for revenue. Also the bonds either has to be in USD or you could get screwed due to the strength of the dollar. FYI bank deposits are insured by the FDIC up to 250k.
  - cryoshon 11y ago
    Credit union. Or, literally any bank that doesn't gamble with the money you give to it. This is much harder to find since the corporate lobbyists gutted Glass-Steagall, but they still exist.
    - positr0n 11y ago
      Don't credit unions still use your deposit as backing for mortgages, auto loans, etc? A run could still happen on a credit union.
      - afarrell 11y ago
        My credit union has loaned me money, so they were in fact gambling that I would pay it back.
    - JamesBarney 11y ago
      I would assume that credit unions are a high default risk than the treasury.
    - jonknee 11y ago
      This isn't for your spare change, if you need to stash billions of dollars you're not walking down to the local credit union and signing up for an account.
      - 6stringmerc 11y ago
        Yes but Glass-Steagall kind of principles are the ones that are continually being lobbied and chipped away at to increase the capacity for risk in the financial markets. See: Trying to treat municipal bonds as high quality liquid assets (vs. illiquid for holding purposes).
    - eldavido 11y ago
      Investment is just a nice word for gambling; there's always risk. I agree that there are required levels of prudence in banking and investment management more generally, but don't pretend there's a well-defined brightline between "gambling", "speculation" and "investment".
- eldavido 11y ago
  It's not that simple. Keep in mind that "wealth" as such can't be stored, it has to be invested/put into something; the market's assessment is that the liquidity, safety, and convenience of treasury debt is a desirable combination to house a few billion of wealth. As an alternative to buying treasuries, you could use a bank, but keep in mind that FDIC only covers accounts up to $250k and beyond that, you're exposed to the bank's credit risk, admittedly small, but a very large concern for an individual/company with millions in cash. Banks don't work the same way for big accounts as small ones, you actually have to weigh things like "will my money be available" and "will the bank default". If the situation gets bad enough, people will start warehousing cash in bunkers, but that's expensive and I highly doubt it could be done for less than 0.05%/year or whatever slightly negative rate the yield is on these things. Banks provide a valuable service by offering depository safekeeping of funds. If we stay in this zero-interest environment much longer, expect to see more fees on checking accounts as net interest margin (what the banks earn between their borrowing costs and their lending prices) continues to fall.
  - codyb 11y ago
    Interesting note on storing cash in "bunkers", according to Wikipedia [0] (referenced to a book "The Accountant's Story"), Escobar and crew used to have to write off 10% of their money stored in warehouses because rats would actually come and nibble away at the bills. Unfathomable to me having so much money that you need literal warehouses for it, but even more amazing is that there was no alternative besides a 10% year over year loss on your stored capital. When you're talking about a cartel that was bringing in roughly $22Bn a year (also Wikipedia) that amounts to roughly $2.2Bn a year sunk to rats. So, in retrospect, if you can do it legally, the Fed's bills seem like a great deal compared to stockpiling cash. And I'm sure you're paying far less to secure those, although I'm not exactly sure how these treasuries work and if you could just purchase one worth $22Bn and put it in a safe somewhere. Seems like it'd be just about impossible to steal something like that and pass it off as your own. [0] - https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accountant-8 https://en.wikipedia.org/wiki/Pablo_Escobar#cite_note-accoun...
    - AnimalMuppet 11y ago
- JamesBarney 11y ago
  It's hard to imagine a situation where the Treasury defaults and U.S. dollars are worth anything. In a situation where the treasury defaults your best investment is probably guns and food. If you don't want to give the money to the treasury where else do you put it? Your options are probably under your mattress or in a bank. Any bank has higher default percentage than the treasury. I'm not sure what is distorted or artificial about what the FED does. They try to stabilize the growth of the money supply so that we have near constant inflation, and full unemployment. If the Fed were to keep rates artificially low we would see inflation, if they kept them artificially high we would see unemployment. Right now because of the zero lower bound we are seeing much more of the latter than the former.
  - eldavido 11y ago
    Incidentally, I think this is the biggest reason bitcoin is going to fail. The demand for money changes, so you either have to pick between a fixed supply, in which case prices will oscillate wildly, or a supply managed by some kind of central authority, that results in an unstable amount of currency but stable prices. I just don't see a currency working as a unit of account or store of wealth with such oscillation in value. Maybe as a medium of exchange, but then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges.
    - michaelcullina 11y ago
      Both elements of your comment are highly astute.
    - aianus 11y ago
      > then you're making every transaction cross an FX exchange (btc/usd) and I doubt that's possible at scale for less than what a scaled payment network (e.g. Visa) charges. Bitcoin is already cheaper as a medium of exchange than credit cards and pretty much all international remittance providers. Coinbase Exchange has a $0.01-$0.02 spread and charges 0.25% for removing liquidity. Stripe costs 3% + $0.30 and Western Union / Wire Transfers are multiples of that. Disclosure: I work for Coinbase
- jonknee 11y ago
  Where would you put the money? In Europe they're actually paying for the privilege of buying short term bonds... There is more money out there than places to invest it.
- dragonwriter 11y ago
  > I don't know what rational investor would take US Dollars and invest them in Treasuries for no return. The treasury has default risk (however small you feel it is) and only pays back in dollars. So you incur the dollar risk anyway, yet you add the treasury risk on top. There's no advantage when there's no return. If the Treasury default risk is smaller than the alternative expected costs for alternative storage of the same dollars (either bank failure risk or, for instance, cost to store and risk of loss of physical bills), then there can be an advantage to 0-interest treasury securities. There is no risk and cost free way to store dollars.
  - raverbashing 11y ago
    What is the typical custody cost of treasuries?
    - eldavido 11y ago
      I don't know exact figures but the treasury security market is widely considered the most liquid market for anything, anywhere, ever (apart from perhaps physical notes in your wallet) so I can't imagine it would be large at all.
- mywittyname 11y ago
  I can help you out here: treasuries are more secure than cash holdings, yet are just as liquid. Institutional investors sometimes feel that it's better to hold cash than stocks/bonds at certain periods. Right now, Berkshire Hathaway is holding billions in t-bonds because there are no good investments to make. For individuals, treasuries offer better yields than CDs and treasurydirect.gov makes it very easy to buy and sell them.
dragonwriter 11y ago
> Well, on the pro-side, at least we don't have to worry about the government defaulting on their interest payments anymore. The fact that the most recent sale of bills was at 0% doesn't actually mean that there is no risk of the government defaulting on existing debt. Because the cost of borrowing is so low, one might think it should mean that, but the nature of the legal rules -- particularly, the debt ceiling -- means that a politically-driven default with no need is still a real possibility.
- narrator 11y ago
  The fed will conduct as many permanent open market operations ,i.e, electronically printing money, as necessary to keep a default from happening. The risk of a default is purely theoretical. The only serious risk is that the dollar exchange rate will start to rapidly deteriorate.
  - guelo 11y ago
    The fed has no control over the debt ceiling. A voluntary political default will always be a possibility as long as tea partiers are at the helm.
    - masterleep 11y ago
      Preventing the government from going into additional debt is approximately the opposite of a default.
      - dragontamer 11y ago
        Government needs to borrow money every week or so to avoid default. That's how the current system works, and anyone who doesn't understand this basic issue needs to stay out of the credit ceiling debate. I'm willing to listen to anyone who thinks they have a solution for getting us out of this "rolling debt" system, but unless you can solve both problems simultaneously, it will be better to just raise the debt ceiling and then start fixing the issue.
nostromo 11y ago
The biggest buyers of US Treasuries (Social Security, The Fed, and the federal government) would buy them at any price. It's a strange market given that the federal government is on both sides of the equation.
- davvid 11y ago
  Not quite.. The Fed != The Federal Government. It's more like.. The Fed is issuing debt, and we (American taxpayers) are (the suckers) on the other side of the equation.
  - neffy 11y ago
    Actually, the Fed typically runs at a profit and pays it into the US Treasury. http://www.federalreserve.gov/newsevents/press/other/20150109a.htm http://www.federalreserve.gov/newsevents/press/other/2015010...
    - fiatmoney 11y ago
      They "run at a profit" because they make "interest income on ... U.S. Treasury securities...". I.e., they are paying the Treasury with money they received from the Treasury, or from bonds guaranteed by the Treasury.
- icu 11y ago
  The Fed is a private bank and is in no way 'part' of the US government. However it has been granted the incredible monopoly of issuing debt to the US Government and essentially enslaving the American taxpayer to perpetual debt. The bank presents itself as part of the US government to the public and many make the mistake of thinking that it is. The only perview the US government has over the Fed is a presidential appointee in the form of the Chairman. Try doing a freedom of information request on the Fed and you will be refused on the basis that it is not a federal agency! Hardly what I would call full transparency and accountability. Today's Fed didn't just come about. Several times over history bankers used their power and influence to create this system but faced opposition from great patriot politicians. Consider this quote: “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809) Another example is President Andrew Jackson, who considered 'killing' the 2nd Bank of the US (an earlier type of the Federal Reserve System) his most important legacy. And finally, Woodrow Wilson the man who damned us all by signing the 1913 Federal Reserve Act, a few years later wrote: “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
justincormack 11y ago
Doesnt make much difference with T-bills. They dont pay interest per se, they just have a single maturity payment, you buy at a discount, or in this case no discount. Also governments rarely default on bills (1 year or less maturity) only on longer dated bonds (over a year), for slightly unclear reasons.

PaulHoule 11y ago

Man, if we could ever get over this allergy into investing in broadband infrastructure, we might create enough investment demand to get interest rates heading up.

dageshi 11y ago

This seems... odd. I don't really understand the way auctions work vs the wider market to understand if this is just a fluke in the selling process, but I wonder if someone somewhere is panicing about something and getting into short term debt?

MCRed 11y ago
There would be no real advantage to this short term debt at %0, even if you're panicking, because you're trading dollars for dollars. EG if you're panicking about the value of the dollar, buying treasury with those dollars that only returns the same number of dollars is no advantage. What this does indicate is that the fed is buying treasuries directly to keep interest rates low. They don't care about return, but are simply going to provide enough demand to keep all treasuries the government wants to issue snapped up... so interest rates don't rise. I doubt they meant to hit %0, and probably just over bought a bit.
- dageshi 11y ago
  There certainly is an advantage if you're worried about the stability of the financial system. Banks can fail, corporations can fail, if the US government fails to repay then things are probably so bad you're probably already dead... If you're worried about getting repaid or you're desperate to get your cash out of whatever it's currently in and into something safe and liquid then short term treasuries are probably your answer. But like I said I don't know if that applies to auctions like this, auctions are not the same as the general market so it may just be a fluke.
- jhulla 11y ago
  There is absolutely an advantage. FDIC insurance limits are $250K. Anymore and you take on a (non-zero) risk of the bank defaulting. Parking cash with US Treasury is substantially safer.
  - icebraining 11y ago
    If the US Treasury were to default, how likely would the FDIC to default as well? After all, part of their funds is itself in the form of Treasury securities.

kingnothing 11y ago

Serious question: why would anyone buy a 0% T-Bill over keeping cash in a bank account?

jsprogrammer 11y ago
You have more money in banks than you have insured? You trust the credit of US government more than any bank?
- samclearman 11y ago
  Given that a US default would likely cause the collapse of the US financial system and possibly the entire world's financial system, it makes perfect sense to trust the US government's credit over that of any bank.
  - jonknee 11y ago
    And the US Government has a big advantage over banks--they can print more USD.
    - jsprogrammer 11y ago
      Banks can 'print' more USD so long as they find a counter-party.
      - jonknee 11y ago
        If you own the bonds you are the counter party.
masklinn 11y ago
Safety guarantees, or deflation expectations. A few years ago France issued (slightly) negative-yield short-term bonds[0] and earlier in the year germany issued pretty seriously negative yield (0.08%) 5 years bonds[1] [0] http://finance.yahoo.com/news/france-sells-bonds-negative-interest-rate-144603419--finance.html http://finance.yahoo.com/news/france-sells-bonds-negative-in... [1] http://money.cnn.com/2015/02/25/investing/germany-negative-bond-yield/index.html http://money.cnn.com/2015/02/25/investing/germany-negative-b...

akg_67 11y ago

Are we going into deflation? If the 3-month treasury bill sold at 0% means investors are expecting to have no inflation or potential deflation in next 3 months.

AnimalMuppet 11y ago
Or that they see a lot of danger in other places in the next three months, and are willing to pay three months worth of inflation as an insurance policy.
jonknee 11y ago
Or the other places to put your money are more risky.

SeoxyS 11y ago

The Swiss Government has been selling 10-year notes at a negative yield of -0.055%. People are willing to pay Switzerland to store their money. http://www.wsj.com/articles/switzerland-first-with-10-year-bond-at-negative-yield-1428489209 http://www.wsj.com/articles/switzerland-first-with-10-year-b...

jonknee 11y ago
The amazing part of that isn't the negative rate, it's the term. Paying for safety makes sense, but paying for safety for ten years is impressive.
- AnimalMuppet 11y ago
  Depends on (peoples' perception of) how hard it is to cash out in the meantime.
tcbawo 11y ago
This is actually a currency trade. Switzerland was forced to devalue against the Euro once. It may happen again.

herge 11y ago

When we talk about 250k in bank accounts being insured by the FDIC, what does that mean? If a bank went bankrupt, how fast would it take for me to get my 250k back from the government?

dsr_ 11y ago
https://www.fdic.gov/consumers/banking/facts/payment.html https://www.fdic.gov/consumers/banking/facts/payment.html says "When there is no open bank acquirer for the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing."
- deleted 11y ago
  [deleted]
dragonwriter 11y ago
> If a bank went bankrupt, how fast would it take for me to get my 250k back from the government? The FDIC's target is two business days from the failure of the bank. [0] IIRC, though, most actual bank failures have resulted in a different FDIC-insured bank taking over all or virtually all deposits, so while bank failures happen all the time, FDIC insurance payouts rarely need to occur. [0] https://www.fdic.gov/consumers/banking/facts/payment.html https://www.fdic.gov/consumers/banking/facts/payment.html
- toomuchtodo 11y ago
  If you're interested, there's an unofficial "problem bank list". Its unofficial because the FDIC doesn't want to create a run on a problem bank. http://problembanklist.com/problem-bank-list/ http://problembanklist.com/problem-bank-list/
mywittyname 11y ago
It's transparent; bank failures happen all the time and account holders rarely notice. The FDIC can broker a transfer of assets from a failed bank to a buyer over a weekend.

afarrell 11y ago

At the risk of sounding fantastically ignorant... If the US decided to reduce its fiscal deficit, wouldn't that take short-term T-bills out of circulation and drive down interest rates further?

mywittyname 11y ago
It's no an ignorant question at all, but this has happened before. In the late 90s the US government was projected by be debt-free by like 2003 and the prospect caused panic in the financial industry and the government reverse course and proceeded to run a deficit again. So short-term, it would not affect rates, but long term budget surpluses are worrisome.
- AnimalMuppet 11y ago
  Um, no, that is not at all why the government reversed course. They did, but that's not why. (Why did they really? Because Republicans in Congress were fine with not letting a Democratic president spend money, but once they got a Republican president, they were unwilling to hold his feet to the fire.) To the parent's question: If such were to happen, they're at least as likely to pay back longer-term debt.
- peter303 11y ago
  It would have taken to late 2020s for all the 30-years to mature. They did stop selling 30-years for short while around the turn of the century. But I dont know if for this reason.
  - AnimalMuppet 11y ago
    If I recall correctly, yes, it was for this reason.

guelo 11y ago

The wasted opportunity of the government not investing this free money into the economy's infrastructure is infuriating.

AnimalMuppet 11y ago
This isn't free money. The interest is free. The principle still needs repayment. The government could in fact profitably invest a bunch of money in infrastructure. The problem is that the government invests, not where investment is needed, but instead where Congress politically decides to invest money. The results tend to be... sub-optimal. Is this a good opportunity for the government to invest in needed infrastructure? Yes, definitely. Is it a good opportunity for Congress to decide to spend a bunch more money? Not in my book.
- saalweachter 11y ago
  A 0% nominal interest rate combined with a positive inflation rate is a negative real interest rate. Money borrowed at a negative real rate isn't free, of course, but it is on sale. If we have a billion dollar project that needs to be done, you could save ~five million by spending the money today and paying for it three months from now.
  - guelo 11y ago
    There's also the return on investment of the new infrastructure.
- JoeAltmaier 11y ago
  Who would buy these? Isn't it riskier than, say, burying your cash in a mason jar in the back yard?
fixxer 11y ago
That would potentially do more harm than good. Crowding out private investment is bad and government contractors aren't exactly efficient. Government isn't going to boost the economy at this point, unless you're advocating WWIII.

roymurdock 11y ago

Let me try to reason out what is going on. On the one hand there we see very strong demand for safe assets: Short term treasury bills are safe because a) risk increases w/ time period and b) they are backed by the US gov't which has a great credit rating and a decent economy to keep it solvent. Investors are willing to take moderate losses (-0.02%) on 3-month T-bills on the secondary market. They are literally paying the government for the reassurance that they will get 99.98% of their money back in 3 months. On the other hand, we are seeing very strong demand for risky assets: S&P 500 was at 2,120 in July, and has lost ~120 points since then but is still 400 points above it's pre-recession 2007 high of 1,560. "Some money managers say the global monetary-policy backdrop is supportive of riskier assets, many of which have become attractive after a selloff in the third quarter." It seems like the supply of money is much too high, and there is not enough demand (viable short-term investments) to soak up the supply. Perhaps if our economy was not so short-term greedy and consumption-driven, we would not be so worried about a few years of necessary savings and long-term investment which would lead to non/negative ROI in the short term, but long-term growth if done correctly. The funny thing is that both the US stock market and the US government bond market, while on opposite sides of the risk spectrum, are both powered by the same engine: the US economy -> US corporations -> US employees -> US education/nutrition/social services/infrastructure/defense. If this engine sputters, all investors will be in a world of pain - bond holders less so, unless the entire system collapses and their bonds become worthless. As the article states, investors are basically giving the government short-term loans when they purchase these T-bills. They have faith that the government will be able to earn some return on them (usually below corporate returns, and hence lower than stock-market interest rates), but that the government has some plan to generate returns nonetheless. So the government should be taking these loans and pumping them into the economy in the way that free market capitalism can't - long-term investments in the basic infrastructure of society. Instead the government continues to keep the liquidity taps open through QE as central banks around the world forge onward with massive asset purchases, putting more money into the corporate market while rotting government balance sheets. Summary: It's like the public and private sector are playing hot potato with an increasing number of hot potatoes. The private market does not want to forego short-term profits and is expecting the government to make the proper investments to spur growth. The government has its hands tied with social security, medicare, and defense spending as well as the debt ceiling, and is pumping money out to the banks with the hope that they will fund long-term investment. They keep going back and forth, swapping more and more money, but the only thing that happens is the distortion of free market prices and signals.

nabla9 11y ago

5-Year, 5-Year Forward Inflation Expectation Rate and 3-Month Treasury Bill: Secondary Market Rate https://research.stlouisfed.org/fred2/graph/?g=2318 https://research.stlouisfed.org/fred2/graph/?g=2318 5-Year Breakeven Inflation Rate https://research.stlouisfed.org/fred2/series/T5YIE https://research.stlouisfed.org/fred2/series/T5YIE 10-Year Breakeven Inflation Rate https://research.stlouisfed.org/fred2/series/T10YIE https://research.stlouisfed.org/fred2/series/T10YIE

steveeq1 11y ago

Ok, someone educate me on this. Isn't a yield of 0% basically "free money"? What's to stop a bank from just "borrowing" trillions or even zillions?

klodolph 11y ago
The US government is the one borrowing the money, not the bank. The rates are set by the market at an auction. From the investor's perspective, you are basically exchanging cash now for cash later, at a 1:1 rate. As for "why don't they borrow trillions"? Well, they do borrow trillions, because the market will buy trillions of dollars in US treasury bonds.
dragonwriter 11y ago
> Isn't a yield of 0% basically "free money"? Yes. > What's to stop a bank from just "borrowing" trillions or even zillions? The yield is on Treasury bills -- that is, US government debt. What's to stop a bank from borrowing anything at that rate is that the market doesn't see banks as safe enough to give them that kind of rate; the US government is a different story. What limits the government's ability to borrow is that the rate is set based on the market-clearing price; if the government tried to issue more debt, that would increase the overall interest rate it would have to pay. (You can look at that as "raising" the price if it tries to "buy" more money, or "lowering" the price if it tries to "sell" more claims for future payment; but it works out the same either way.)
jldugger 11y ago
It's an auction run by the Fed, for the Fed. The US Fed asks 'everyone line up in order of willingness to give us cheap interest rates for 3 months.' They then walk down the line, borrowing money from everyone till the borrow the amount they wanted, and agree to pay everyone interest at the rate the last person they borrowed from was asking for. In this case, enough people bid zero that all lenders are getting zero. Banks don't get this zero percent rate. And the government itself can't get a zero percent rate for unlimited amounts, even if the debt ceiling weren't a thing; eventually the Fed's line up of lenders runs out of people willing to lend at zero percent interest.

jhallenworld 11y ago

And yet there is no inflation: http://www.multpl.com/inflation/table http://www.multpl.com/inflation/table (no doubt helped by the low cost of labor and oil). I guess people can't figure out how to make money from these zero-interest loans. As someone with a mortgage, I would really like to see some inflation (well, wage inflation anyway).

acd 11y ago

Demographics affects yelds on bonds, interest rates and housing prices. Demographics has had a downward trend on the interest rate but that is about to change as there will be a shortage of labour. It´s summarized in this article http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11882915/Deflation-supercyle-is-over-as-world-runs-out-of-workers.html http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...