How would you like free money?
That’s what the US Government will get on Thursday. Earlier this week the Treasury Department held an auction for one-month Treasury Bills—debt instruments that trade at a discount to maturity, and then pay off at par when they mature. Only on Monday there was no discount–they auctioned $18 billion in 4-week bills, for which they received $100 billion in bids. And the average bid was—zero percent. That’s right. Investors with $100 billion in cash are able and willing to give the US Government their money to hold for them—for nothing.
It’s a binge-borrower’s dream come true. Free money could eliminate $250 billion in interest expense from our $3.8 trillion budget. Of course, it would be imprudent to fund the Government month-to-month, and this was only an $18 billion auction. Over the course of last year Treasury needed about $60 billion per month. But all those bids indicate that there’s a bond shortage out there—at least a shortage of highly secure, highly liquid short-term bonds.
And this is no surprise, given the changes in market structure and expectations since the financial crisis. Institutional investors want collateral for their deals, and sometimes only T-bills will do. Money-market funds—which pay nothing—are mandated to hold a certain percentage of their funds in T-bills. And everyone is worried about what the Fed will do with interest rates—policy rates, tapering QE, interest on reserves—with a new Chair and several new Committee members. Holding short bills is safe.
So for now, the Government is getting its money for nothing. Now if only they could get the rest of their services for free.
Douglas R. Tengdin, CFA
Chief Investment Officer