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Treasury Considers Going Negative on T-Bills

U.S. Department of Treasury headquarters in Washington, D.C.
Source: wikipedia

The U.S. Treasury is considering permitting negative interest rate bids in auctions for Treasury bills.

Typically Treasury bills, which have maturities between 4 and 52 weeks from issuance, are sold at a discount to par value, with no interest payments prior to maturity. The interest is the difference between the what you pay for the bill and the par value.

So, for instance, you would buy a $1,000 52-week T-bill for $999. When the bill matures you would get $1 more than you paid. Your interest rate would be 0.1 percent.

The Treasury Borrowing Advisory Committee, which brings together dealers and Treasury officials, met yesterday in a closed meeting at the Hays Adams Hotel.  The committee members unanimously agreed that the Treasury should start permitting negative interest rate bids for T-bills.

This would mean that you would buy a $1,000 52-week T-bill for $1,001.

When it matured after a year, you would have a loss of $1. Your interest rate would be negative 0.1 percent.

Here’s what the minutes of the advisory committee say:

The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions.  DAS Rutherford noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable.   It was the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible.

Rutherford noted that any decision on this policy change would likely be made at the May refunding.

This isn’t just some crazy idea of the committee. The U.S. Treasury Department is studying the possibility of allowing negative interest bids, according to an unnamed Treasury official who spoke to Reuters.

The willingness to buy bonds at negative yields is usually taken as an indicator of a high-level of anxiety.

Despite appearances, buying T-bills at negative yields does not necessarily lock in losses. If demand for the safety and liquidity of T-bills grows, those that purchased them at auction may be able to sell them for higher prices in the secondary market. That $1000 T-Bill you bought for $1001 might be worth $1003 if the world goes to hell in a handbasket. In other words, bidding a negative yield can be speculation that yields will fall even further.

Last year, one month T-bills traded in the secondary market at negative yields several times. Longer dated Treasury bonds have negative yields in the secondary market all the way out to the ten-year.

Last month, Germany sold $4.96 billion of six-month bills that had an average yield of negative 0.0122%. This was the first time yields at a German debt auction moved into negative territory.

The Treasury, however, has never permitted buyers of T-bills (or longer-maturity Treasurys) to bid negative rates at auctions.  It has sold TIPS—Treasury Inflation Protected Securities—at negative rates, an indication that buyers believed there would be inflation in the future.

Now it seems the Treasury is willing to follow the secondary market into negative territory.

All T-bills have been trading at positive yields in 2012.

Negative interest rates have been advocated for policy reasons, as a way of spurring lending and spending, since they penalize saving. But its far from clear that this would work out.

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