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Less than zero: T-bill interest rate goes negative

December 9, 2008 |  1:02 pm

Wall Street keeps wondering how low interest rates can go on Treasury securities. Now we find out that even zero may not be low enough.

The annualized yield on three-month T-bills dipped slightly below zero at one point today, to negative 0.01%, according to Bloomberg News data. In effect, a negative yield means some investors are so hungry for Treasuries that they’re willing to pay more for a security than they’ll get back when it matures, and earn no interest while they hold it.

The last time short-term Treasury yields were negative was during the late 1930s and early 1940s, according to the authoritative book "A History of Interest Rates," by Sidney Homer and Richard Sylla.

Tyieldsdec9 The negative rates today were in the so-called secondary market, where investors trade with each other. The Treasury hasn’t yet auctioned T-bills at a negative rate, but it got close this morning: The government sold $30 billion in new four-week T-bills at a zero yield -- exactly 0.000%, according to the Treasury’s report on the sale.

"We were all watching it agog today," said Steve Meyerhardt, a Treasury spokesman in Washington.

As I noted in this post on Monday, many wounded banks and other financial institutions are hoarding Treasury issues to bolster their balance sheets before year-end. They want to keep cash in only the safest securities, and that means Uncle Sam’s paper. Yield is secondary, or no factor at all; this is about having an iron-clad guarantee of principal value.

Despite the government’s huge (and growing) borrowing wave to pay for the financial-system bailout and normal deficit spending, "They haven’t created enough [debt] to meet the demand," said Tom Di Galoma, head of Treasury trading at brokerage Jefferies & Co. in New York.

The question is whether demand will remain this extreme after year-end. George Goncalves, chief Treasury strategist at Morgan Stanley & Co. in New York, figures many investors are "parking cash in Treasuries while they decide what to do with the money next year."

But if January arrives and the hunger for short-term government securities doesn’t abate somewhat, it could send a scary message about what many investors believe is ahead for the economy and financial system, Goncalves said.

-- Tom Petruno

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