Wednesday, September 17, 2008
an impossible flight to quality
In July, the TIC data indicated that foreign central banks migrated in mass toward the Treasury market.
Today everyone did.
The 3 month Treasury bill now yields nothing. The Treasury though will give you your money back …
The fall in Treasury yields came even as the US government indicated that it was going to issue a lot of bills and bonds to help the Fed grow its balance sheet.
I guess this is what a close to systemic financial crisis in the US looks like.
The broker-dealers were performing many of the economic functions of banks: The expansion of their balance sheets financed a lot of credit expansion in the US over the past few years. They no longer can access the debt market. That is a problem.
as john jansen notes, this is tied to the problems in the reserve primary fund.
The proximate cause of the pressure in the money markets is the news late yesterday that the Reserve Fund broke the sacrosanct $1 level and suspended withdrawals from the fund. The fund attributed the situation to its exposure to Lehman Brothers.
This complicates matters in the front end of the market place. The trader with whom I spoke said that “it was as if a veil had been removed” from the market. In his opinion, clients will be examining much more closely the items that individual money funds hold. The base assumption of Mom and Pop that money funds are as safe as bank accounts has been challenged.
The trader said that he expects to see withdrawals and redemptions from funds with the money heading to T bills or the safety of an FDIC bank account. (That is another posting another time.) He noted that there is over $3.5 trillion in money funds and if only a very small percentage of that money is shifted it could cause massive dislocations.
In that event, Money funds would be busy raising cash and not buying CP and other short dated instruments. That would put tremendous pressure on funding levels in the front end.
the credit crunch has found more fuel for the fire. meanwhile the markets are getting hosed -- s&p has been off 4% at times and credit spreads are blowing out everywhere.
UPDATE: ft alphaville points out that this is the lowest yield on t-bills since pearl harbor was bombed.
UPDATE: more from john jansen:
The flight to bills had begun yesterday and one dealer with whom I spoke marked the one month bill at 17 basis points yesterday. They are currently zero and have traded negative yield. I spoke with a trader at one shop who noted that his bill trader made a significant number of sales at negative rates today. The three month T bill closed yesterday at 85 basis points and it currently sits at 15 basis points. The yield on the six month bill is lower by about 50 basis points and the yield on the one year bill is lower by 17 basis points.
The Treasury actually sold $40billion of 35 day T bills today a rate of 30 basis points. That was the highest rate and represented the level at which the Treasury awarded securities. There were some bids at zero and the median bid was 5 basis points. Indirect bidders (foreign central banks) took more than half the issue.
to borrow one of his past lines, THIS IS FINANCIAL SCIENCE FICTION.