Something’s Up: Panic Buying of Super-Liquid Treasuries

Despite the rally in stocks that left the S&P 500 up for the fifth day in a row, the longest such series since December, there was, at the other end of the spectrum, a whiff of panic.

It wasn’t that visible in ten-year Treasuries, though intense buying drove them higher, with the yield dropping to 1.989% Monday morning, the lowest since April, before ending the day at 2.06%. It was in short maturities, the safest and most liquid financial assets in the world: The US Treasury was able to sell $21 billion of six-month bills at a minuscule yield of 0.065%.

It also auctioned off $21 billion in three-month bills. Each dollar of the bills offered got chased by $4.14 in bids – the highest bid-to-cover ratio since June 22 when China was in full-crash mode. With buyers jostling for position to grab whatever they could, these bills sold at a yield of zero for the first time in history.

Even more liquid one-month bills have sold at zero yield in five of the six most recent auctions. And in the secondary market, some bills have traded at slightly negative yields for a while; investors who hold these bills to maturity end up with a guaranteed loss, the price they’re willing to pay to keep their money save and liquid.

But this was the first time for the Treasury to sell three-month bills at zero yield.

OK, there’s a supply issue. The gross national debt has been bouncing into the debt ceiling for months. So the Treasury can only sell new debt to replace maturing debt. The actual borrowing needs of the government are not met by selling more Treasuries but by temporarily siphoning money from other government accounts – “extraordinary measures,” as it’s called. But there is a limit. Beyond it lies the official out-of-money date, which the Treasury now projects to be November 5.

So tight supply meets desperate demand. Even cash in bank would earn more. But for these large investors, such as money-market funds, their cash in bank would be uninsured and could go up in smoke during a crisis.

Which leaves us with a quandary: The stock market rally says folks believe that the bonanza will continue, that risks have disappeared, that the economy is hot, and that the Fed will never take away the punchbowl.

But the Treasury market shows that others are desperate to put their money into highly liquid and safe places, even if it costs them money – a behavior normally visible ahead of a looming crisis. Even then, the Treasury had never before been able to auction off three-month T-bills at a yield of zero.

Why are these people so spooked? Why don’t they get the drift that momentum is back, that everything is under control, that it’s time to plow back into risk?

Fed flip-flopping has something to do with it. By now, no one believes anything the Fed says, one way or the other. It doesn’t matter how many Fed heads come out and proclaim that a rate increase is still on the table for later this year. It doesn’t matter how often they claim that inflation will once again rise. No one believes them anymore.

On Monday, Fed funds futures – where Wall Street rate-hike beliefs turn into money – put the likelihood of a rate hike during the Fed’s October 27-28 meeting at 6% and at 32% for its December 15-16 meeting.

Traders have been searching for confirmation that the Fed would never raise rates. They’re clamoring for ZIRP infinity. Most of our corporate heroes, after using the ZIRP years to load up on cheap debt, won’t be able to roll over this debt at “normalized” rates without skidding into serious trouble. And today’s highly leveraged investment models don’t work when there is suddenly a real cost of capital.

They found what they were looking for: a crummy but not catastrophic jobs report on Friday, a steepening deterioration in corporate revenues and earnings, and a swooning manufacturing sector. They brush off other data such as booming auto sales, a steamy housing market, or rents that are getting closer to the stratosphere in a world where real wages have been stagnating.

So it doesn’t matter that Fed heads are beating the bushes, trying to get markets to believe that a rate hike is still on the table.

“We’ll have to see whether the employment report was a little anomalous or whether it turns out to be more of a broader pattern,” Boston Fed president Eric Rosengren told MarketWatch. “If this is an anomalous report then, if the data came in sufficiently, I would be comfortable possibly raising rates by the end of the year.”

On September 24, when the Fed decided to keep its benchmark rates at near zero, it added the huge caveat that 13 out of 17 Fed officials – “including myself,” as Fed Chair Janet Yellen emphasized – expected a rate hike this year.

Rosengren pointed out that the jobs report was just “one report,” and that other data would have to confirm this weakness. He wasn’t convinced it was a broader pattern. Much of the weakness was in manufacturing and mining. That’s not a new development.

“I think the real question is whether the domestic economy offsets some of the headwinds we’re seeing from the international sector,” he said. “I don’t think we have enough data yet to know whether that actually is going to occur.”

So, according to him and numerous other Fed heads, rate hikes are still prominently on the table for this year. But after all the flip-flopping, no one believes the Fed anymore. The Fed’s credibility has gone to heck. The Fed is never going to put its foot down, ever again. That’s what the market is increasingly sure of.

And if it does put its foot down – as it has been indicating for months, only to flip-flop at the last moment – it will be a wild “surprise,” the kind that markets don’t like.

So if the stock market shows that investors once again are getting drunk at the Fed’s punchbowl, why is there another group of investors who are spooked, who want to put their money into the safest and most liquid asset even if it costs them money? Is it because they think that the Fed will raise rates despite market expectations to the contrary, and that the ensuing “surprise” will trigger market gyrations of the kind where safe and liquid assets suddenly become priceless?

These spooked folks might see the stock market rally as yet one more element that would make the Fed feel at ease about raising rates, and thus one more reason to seek safe and liquid assets for that period.

For companies, it’s tough out there. Revenues and earnings are shrinking. It’s a global problem, rather than just the fault of the strong dollar. Read… Last 2 Times this Happened, the US was Falling into Recession

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  18 comments for “Something’s Up: Panic Buying of Super-Liquid Treasuries

  1. rich black says:

    Why would any entities buy Treasuries at these low interest rates, if they thought that rates were going to be pushed up at future Treasuries sales, when this would cause the Treasuries they just purchased to be worth less? It would make more sense, if those buying Treasuries now were expecting some kind of QE, which would lower rates and increase the values of the Treasuries they are holding. Perhaps the best explanation is that these Treasuries buyers need liquidity and safety and don’t believe that the Fed will raise rates.

    The real questions are, why are people buying stocks, and who are these people that are buying them?

  2. MC says:

    I suspect the underlying cause for the recent bipolar behavior of financial market (stock rally and insatiable appetite for US treasuries) is what has been preventing a repetion of 2009 in face of economic data (chiefly originating in Asia) which in other times would have sent investors running for the hills: we still have an oversupply of hope and optimism, but it’s running out.

    As former superbulls become more and more cautious after getting cold feet in Asia or by simply doing the math (booming car sales, rising food prices and stagnating wages: how do they add up?) they are starting to hedge their bets. And what better way to do so than buying good old US treasuries? They are plentiful (hence relatively affordable), still unstained by scandals (unlike gold) and the Fed may have as much credibility left as Enron, but it won’t go into full Draghi or, God forbid, Kuroda mode. In short treasuries may cost you money but they won’t depreciate as fast as euro and yen denominated assets. For European and Asian investors they do make a lot of sense.

  3. Michael says:

    The same reason that people bought the dips over the last few years. It has been a strategy that works.

  4. lg says:

    “People” buying stocks? I’d say it’s more like the central banks of Japan , Europe and the US
    are proping up markets. Buying and selling each other’s worthless treasuries.
    Welcome to the wizard of OZ!

    • Shawn says:

      Whatever happened to the good old days when stock values reflected on how good (or bad) a particular company was doing.

  5. Michael says:

    I know a number of “people” in the market. In fact, there are large number of people and firms who make a living by trading the market. If you own a 401K or retirement IRA you are in the market.

  6. The correlation between treasuries and stock prices is spotty. There is a long term correlation, but the short term correlation is rather weak. I wouldn’t look too much into this.

  7. Lars says:

    If we are heading into a banking system collapse, then you want to get your money out of the bank and into US Treasurys, and the biggest players may be doing just that. Is there a way to get data on banking system large withdrawals ?

    • CrazyCooter says:

      BankRegData …

      … has a friendly UI around a lot of the call report data for banks. They limit the free page views (see the grey number in the top corner of the page), so surf with purpose. May not be exactly what you want, but it is a pretty good free source for us retail folks to shop for banks that are at least in better shape than their peers.



    • Nick Kelly says:

      If you want insulation against a ‘banking collapse’ one exceeding deposit insurance, you could consider Canadian banks. About ten thousand US banks went under in the Depression, with no deposit insurance.
      No one lost a dime in a Canadian bank- last time was 1926 when Home Bank went bust- this brought in deposit insurance.
      But if you are forseeing a catastrophe- exceeding the Depression, I’m puzzled you would feel safe with ANY government piece of paper.
      The government can do anything, including converting a Treasury into an IOU of some kind. The antics of Argentina are instructive- they are actually on this planet. They probably haven’t done anything unique in history. Seized US$ accounts, just peso’d $US mutual funds- if you are imagining a catastrophe you have to imagine the US doing all kinds of creative ‘theft’
      You sound like a gold or silver guy- but here is a thought.
      I’ve always been kind of impressed with how cheap, compact and durable .22 ammo is. A tiny little box with 50 is pretty cheap and will store for 20 years with no problem.
      Of course for serious hunting you need bigger ammo but you get my drift.

      • Nick Kelly says:

        PS to last. I didn’t dare quote price of 22 ammo cuz its been decades, so I googled and there is a shortage in Canada. Apparently people are staking out Walmart etc. and buying 50 of the 50 round boxes at a time.
        But its still a cheap durable compact tradeable and useful item. You can within limits put food on your table with it.
        I’m not going into other aspects because this is Canada. Still…

  8. Petunia says:

    Peak consumption is $100M apartments and treasuries with negative returns. It doesn’t take a genius to see that no apartment is worth $100M unless the money is worthless. And that an investment with a negative return is a bad idea, unless it really isn’t an investment but only a place to park your money for a fee. Neither is an investment because the value is based on fear and speculation and cannot be maintained over time.

  9. pogohere says:

    “OK, there’s a supply issue.”

    I’ll say: I ran across the data on “Daily Total US Treasury and Agency Fails” at… and am interested in the significance, if any, of ~$50 bil in treasury/agency fails per day. Responses welcome.

    • cherchezlafemme says:

      $50 billion/day times 20 trading days is $1 trillion per month. Failing to deliver is essentially printing money by the seller. Backdoor QE so that it doesn’t show up in the Fed or Treasury stats?

      My question is: what does the buyer actually have since the seller never delivers? Sounds like fraud on an unbelievably massive scale.

  10. Julian the Apostate says:

    Tosh lg pay no attention to the man behind the curtain!

Comments are closed.