At the point of no return

Petruno is a Times staff writer.

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 Tuesday, to negative 0.01%, according to Bloomberg News data. Late in the day the yield rose to positive 0.01%.

In effect, a negative yield means some investors are so hungry for Treasuries -- and so afraid to put their money anywhere else -- 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.


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

That means buyers of those bills will get back, after four weeks, just what they paid, with no interest.

“We were all watching it agog,” Steve Meyerhardt, a Treasury spokesman in Washington, said of the auction.

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 ironclad 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.





Annualized yields on U.S. Treasury securities late Tuesday


3-month: 0.01%

6-month: 0.24%

1-year: 0.44%

2-year: 0.84%


5-year: 1.61%

10-year: 2.67%

30-year: 3.07%

Source: Associated Press