Investors are pushing rates on Treasury bills into negative territory due to a scarcity of safe assets as funding pressures intensify with the end of the financial quarter.
The moves are affecting bills that mature in October and November as the third quarter ends next Tuesday, sparking a scramble among money market funds and investors looking to park their cash in havens.
The situation has been exacerbated by big banks – now under much tougher regulatory restraints since the financial crisis – reducing their usual funding activity.
The end of financial quarters is generally marked by investors and banks liquidating trades over the past three months and parking the proceeds into short-dated securities, a practice known as window dressing for reporting purposes.
The scale of demand for Treasury bills, viewed as ultra-safe securities, has prompted investors to in effect pay the US government for temporarily holding their cash over the end of the quarter – behaviour seen during the financial crisis of 2008.
“People who want to be invested past September 30 are hoarding Treasury bills pre-emptively,” said Lou Crandall, economist at Wrightson Icap.
“Money funds’ willingness to lock in term investments at low rates through October 1 now will, if anything, make the quarter-end squeeze in the overnight market on September 30 even more extreme as banks accepting that cash are tying up whatever limited balance sheet space they might be willing to make available over the statement date.”
Treasury bills that expire on October 2 were quoted in a price range of between -0.015 and -0.02 per cent on Wednesday with bills expiring on November 6 quoted from 0 to -0.005 per cent.
Bills that expire in December are around 0 per cent while the scarcity of safe assets had also pulled the yield for three-month bills down to 0.015 per cent.
This RRP facility soaks up cash in the financial system and at the end of the second quarter attracted $339bn of funds as banks reduced their financing role in the money markets.
With demand for the RRP this quarter seen approaching $400bn and even $500bn, according to some analysts, the $300bn cap has forced money market funds into action.
“There are few places to park cash at quarter-end and people have relied on the Fed’s RRP but the $300bn ceiling is pushing them to buy bills,” said Peter Crane, president of Crane Data, a money market research service.
The Fed has been testing the RRP for the past year and gauging the behaviour of money funds. Demand for funding over the quarter end prompted the $300bn cap.
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