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As if interest rates weren't low enough . . .

November 20, 2009 |  5:00 am

Uncle Sam is getting yet another break on his borrowing costs.

Suddenly, cash is again fighting to get into the haven of shorter-term Treasury securities, driving yields down to levels last seen after the first stage of the financial-system meltdown a year ago.

It may look like another fear-driven panic, but this time is different: In large part the latest decline in shorter-term yields just stems from moves by banks and other financial firms to bolster their balance sheets with highly liquid assets as 2009 ends, says Tom di Galoma, head of U.S. rates trading at Guggenheim Capital Markets in New York.

"They’re dressing up the books for year-end," he said. The more liquid you can look to your regulators, the better.

Late last year the hunger for Treasuries reflected a deep-seated dread that the financial system would continue to implode. That kind of sentiment is mostly absent this time around.

Fi-2-year-note The annualized yield on three-month T-bills fell to a barely positive 0.01% on Thursday, down from 0.07% at the beginning of the week and the lowest level since last December.

The two-year T-note yield slid to 0.70%, compared with 0.81% a week earlier and also the lowest since December.

Traders said some T-bills were trading at slightly negative yields -- meaning buyers were in effect paying to keep their money in the securities, as opposed to earning a return on them.

Another factor pushing T-bill yields down: Growing demand is facing a smaller supply of new debt, as the Treasury winds down some of the deficit-financing programs that had pumped up T-bill issuance. The Treasury was selling as much as $33 billion a week in three-month bills in August. This week’s auction was for $30 billion.

Meanwhile, the Treasury continues to boost sales of longer-term securities.

As for the drop in the two-year T-note yield, that shows that buyers at these levels believe there’s no risk in locking in a yield of well under 1% on those securities. In turn, that implies growing faith that the Federal Reserve won’t be raising its benchmark short-term rate from near zero anytime soon -- maybe not even in the second half of 2010, which had seemed like a reasonable window for a Fed hike.

The view that the central bank could stay on hold for longer has been buttressed by recent comments from Fed officials including Janet Yellen, James Bullard and Chairman Ben S. Bernanke.

"Fed-speak lately has been pretty dovish" on rates, notes Jim Galluzzo, a Treasury trader at RBS Securities in Stamford, Conn.

Just what the short-term end of the Treasury market loves to hear.

-- Tom Petruno