Treasury yields go below zero

The yield on the three-month U.S. treasury bill went below zero for the first time ever.  This seems to be an unprecedented move where investors are actually paying the U.S. Government to borrow money.  In my estimation, this is not just a flight to a safe haven in turbulent times.  Negative interest rates in U.S. treasurys reveal a bubble that will pop and end badly for all concerned.

Unfortunately, this is the end effect of easy money: the liquidity needs to go somewhere and it usually leads to a destabilizing bubble somewhere in the global financial system.  While I am comfortable with quantitative easing as a policy response to the credit crisis, low interest rates are having the usual unintended consequences.

Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worse financial crisis since the Great Depression.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

The benchmark 10-year note’s yield dropped seven basis points, or 0.07 percentage point, to 2.67 percent at 3:10 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 21/32, or $6.56 per $1,000 face amount, to 109 12/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.

The two-year note’s yield fell nine basis points to 0.85 percent. It dropped to a record low of 0.77 percent on Dec. 5.

If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.

Expect me to go into greater detail on this subject in upcoming posts.

Treasury Bills Trade at Negative Rates as Haven Demand Surges – Bloomberg

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