The Zero Yield Economy

We mentioned this yesterday as it happened, but Treasuries traded down to previously unseen yields. The 3 month T-bill went negative yield for the first time ever.

At auction, Treasury sold $27 billion of three-month bills at a discount rate of 0.005%. This is the lowest yield since it starting auctioning the securities in 1929.

Just as astounding, the U.S. sold $30 billion of four-week T-bills, at zero percent for the first time ever (4 week treasuries have been around only since 2001).

A quick para:

When was the last time you invested in something that you knew wouldn’t make money?

In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.

The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.

While this will lower the cost of borrowing for the United States government, economists worry that a widespread hunkering-down could have broader implications that could slow an economic recovery. If investors remain reluctant to put money into stocks and corporate bonds, that could choke off funds that businesses need to keep financing their day-to-day operations.

Investors accepted the zero percent rate in the government’s auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.

In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.

Quite remarkable.


Investors Buy U.S. Debt at Zero Yield
NYT, December 9, 2008

Treasury Bills Trade at Negative Rates as Haven Demand Surges
Daniel Kruger and Cordell Eddings
Bloomberg Dec. 9 2008

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