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Wednesday, December 10, 2008

I Give You The Stupidity Trap... Errr... Liquidity Trap

“No one has ever paid above and beyond their interest income to be in a fund. But if we see another cut, we’ll likely see negative yields.” –Peter Crane

I give you the Stupidity Trap… errr… the Liquidity Trap

Treasury Bills Trade at Negative Rates as Haven Demand Surges: “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 worst 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 tumbled 11 basis points, or 0.11 percentage point, to 2.63 percent at 4:48 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 31/32, or $9.69 per $1,000 face amount, to 109 23/32. 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 10 basis points to 0.84 percent. It dropped to a record low of 0.77 percent on Dec. 5.

If you invested $1 million in three-month bills at today’s 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.”

Awesome. Just awesome. What could possibly go wrong in a zero rate world? Oh wait, all those under funded pension plans can’t earn the yields they need to fund the outrageous promises that were made to indignant, arrogant Baby Boomers during this Age of Entitlement.

*** Astute market watchers may recall that it was the low rate world created by Alan ‘The Maestro’ Greenspan that inspired pension plans to ‘reach for yield’ and migrate into securitized debt such as Mortgage Backed Securities (MBSs) and Collateralized Debt Obligations (CDOs) in the first place. All aboard the failroad? Good. Giddy up! ***

Money-Market Fund Yields May Fall to Less Than Zero, Crane Says: “Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.

Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”

The U.S. Treasury sold $27 billion of three-month bills on Dec. 8 at a discount rate of 0.005 percent, the lowest since it started auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills yesterday at zero percent for the first time since it began selling that debt in 2001. Money- market managers could impose a system of incremental debits or charge monthly account fees, Crane said.

Institutional money-market funds that invest only in Treasuries and related repurchase agreements had an average seven-day yield of 0.12 percent, after fees, as of Dec. 8, according to iMoneyNet, a research firm also based in Westborough. The average institutional Treasury money fund charges a management fee of 0.29 percent, Crane said.

Money-market funds are considered the safest and most liquid investment after bank deposits and Treasuries.

Their shares sell and are redeemed at $1 each, and the income generated by their investments is credited daily to a shareholder’s account. At the end of every month, the credits are paid either in cash or by giving the investor more shares.

Daily Charges

According to Crane, if a fund’s expenses exceed its income, accounts could accrue daily charges instead of credits. The fund would then settle the charges at the end of the month by taking shares away.

Such charges aren’t the same as breaking the buck, which happens when investment losses cause a money fund’s net asset value to fall below $1 a share. In September, the Reserve Primary Fund fell to 97 cents a share because of losses on debt issued by the bankrupt Lehman Brothers Holdings Inc. triggering a run on U.S. money-market funds. It was the second money fund ever to break the buck.

Instead of charges, money funds could introduce a monthly account fee that is taken out in shares, Crane said. Either way, investors would lose money, he said.

No New Cash

Of the 500 largest U.S. money-market funds, 41 have daily annualized yields at or less than 0.05 percent, including four funds with zero yield. The 41 funds are probably waiving all or part of their regular fees to keep from taking money out of principle, Crane said.

Falling yields on Treasuries led some Treasury-only funds, including those run by JPMorgan Chase & Co. in New York and Boston’s Evergreen Investments, to turn away new investors. Barring new customers protects returns for investors already in the funds because managers don’t have to buy as many new Treasuries with yields lower than current holdings.

The Federal Open Markets Committee is scheduled to meet Dec. 16 in Washington. The panel is expected to halve its target rate to 0.5 percent, according to the average estimate of 72 economists surveyed by Bloomberg.”

Related Posts:
Fed Admits Quantitative Easing
Zero Rate World, The Age of Free Money: We’re Doomed
ZIRP, Zero, Nada, Free Money and a Big Mess
Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats
Japan Stuck, Quantitative Easing in the US
Closer to ZIRP, Liquidity Trap, Lost Decade
Japan v2.0: GLOBAL Liquidity Trap
Japan v2.0
The Lost Decade
Stimulus Package: Does it Even Work

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary
9) Really Scary Fed Charts: OCT, Now Crazy Scary
10) Really Scary Fed Charts: NOV, US Bankrupt?


Anonymous said...


Can you comment or shed some light to the FED's thinking about issuing their own debt or f-bills?

Ben Bittrolff said...


The Fed issuing their own debt is the modern, digital age way of literally printing money.

Basically the Fed creates money by creating a liability (f-bills) on side of the balance sheet and money (digital ones and zeros) on the other. Viola! Bling bling!

This is the next logical step in a quantitative easing campaign.

Don't worry it's hyper inflationary... yet. (They aren't printing enough to overcome the amount of debt and money currently being destroyed.)

Deflation first. Inflation or hyperinflation later.

Ben Bittrolff said...

That should say ISN'T hyperinflationary...

Bobby and Jean the amateur world travelers said...


Thanks for the response and the answer (you made it clear, i had it all backwards) because I figured they needed to pull money out of the magicians hat.
It was difficult for me to grasp because if they sold bills they would receive cash from investors for the exchange for those bills (like t-bills that they currently use) but now I understand because they are selling them from one side to the other.

So they will be paying themselves the interest on those bills?

I don't see hyper-inflation until housing flattens out, or until wages can support credit. the globe is saturated with to much credit an no ability of wages to pay the credit back. Since asset (investments collapsed) that investment can't payback credit/interest.
Since wages never caught up from the last bubble burst thanks to easy money.... we better buckle down for some tough times for years ahead.

maybe i got that wrong but velocity will not increase anytime soon.

Hmm... even if heli ben monetizes debt and there was 5 quintillion bucks hoarded by the banking system, I doubt that will convince consumers to sign promissory notes... just a thought.

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