Some Investors Pay the Treasury Interest for Its Borrowing From Them

[donsutherland1]

Today, CNBC reported:

Investors fearful of deflation and riskier assets scrambled to hand over cash to the U.S. Treasury in return for no interest at an auction Tuesday, while some T-bill rates fell below zero in the market...

The U.S. Treasury Department said it sold four-week bills at a high rate of 0.000 percent, a level never before seen, in a $30 billion auction.

Bloomberg.com added, "Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worse financial crisis since the Great Depression."

 

[Onion Eater]

Today, CNBC reported:

Investors fearful of deflation and riskier assets scrambled to hand over cash to the U.S. Treasury in return for no interest at an auction Tuesday, while some T-bill rates fell below zero in the market...

The U.S. Treasury Department said it sold four-week bills at a high rate of 0.000 percent, a level never before seen, in a $30 billion auction.

Bloomberg.com added, "Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worse financial crisis since the Great Depression."

My! What is the world coming to?

 

[Khayembii Communique]

This is absolutely ridiculous.

 

[donsutherland1]

An interest rate reduction by the Federal Reserve, which is likely on December 16, could lead to some money market mutual funds providing negative returns. Bloomberg.com reported:

Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.

Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”

 

[Onion Eater]

Professor Fekete writes:

"RED ALERT: GOLD BACKWARDATION!!!

"Urgent Update!

"December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history..."

But he is conspicuously silent when the same thing happens with T-Bills.

I posted a thread recently (Where Mises Went Wrong - Prof. Fekete) quoting Fekete lamenting having been blacklisted by Lew Rockwell. I sympathize with his plight and it pleases me to know that I am not the only one who has been shut out of all the libertarian forums. Also, it galls me that Rockwell, who has a BS in English, had the nerve to blacklist a full professor of mathematics.

But that doesn't mean that I've suddenly become a goldbug.

The goldbugs have a very narrow focus. To refer to the backwardation in the gold market earlier this month as "a landmark in the saga of the collapsing international monetary system" is really extreme. The market for T-Bills is vastly bigger than the market for gold, but Fekete ignores events there. Gold, like all higher-order goods, is volatile. Also, small markets are always more volatile than big markets, so backwardation there really does not justify the "red alert" or the scary talk about our monetary system collapsing.

Fekete is far more intelligent than the goldbugs whom I was debating at the Daily Paul (summarized on my website page, Gold Does Not Have Intrinsic Value) and his education is in math - as mine is - but he still has the narrow focus of the simplistic goldbuggery promoted at the Daily Paul.

They really need to look around and notice that the market economy is much bigger than the little slice that they've cut out for themselves.

 

[Iriemon]

This is absolutely ridiculous.

We are seeing the flip opposite of the "irrational exhuberance" that induced people to invest in stocks when they were absurdely overprice.

If you believe the stocks will crash and banks will fail and prices fall, holding T-Bills at -0- interest makes sense.

 

[DeeJayH]

Merry Christmas :shock::shock::shock::shock:

 

[Khayembii Communique]

If you believe the stocks will crash and banks will fail and prices fall, holding T-Bills at -0- interest makes sense.

True, but I don't think that's entirely accurate. Why would one invest to lose money? Even in this situation it doesn't make much sense.

The only thing I can really think of is that investors that are compelled to invest (such as mutual fund managers) consider it more secure to invest in these treasury bills at 0% interest or even at a small loss than taking a larger risk and investing in anything else.

Other than that I don't really see why anyone would do this.

 

[donsutherland1]

Why would one invest to lose money? Even in this situation it doesn't make much sense.

Actually, during a time of deflation, such a move could make sense. Here's an example:

An institutional fund pays $1,000,000 for 1-year securities yielding -0.1%. 12 months later, the institutional fund receives $999,000*. The fund has realized a capital loss of $1,000.

Assuming that the institutional fund pays the maximum 15% capital gains tax, it receives a tax benefit of $150**. That makes the net loss $850. The after-tax principal is now $999,150.

Now, assume that there is 2% deflation during the 12 months. The real value of the principal becomes $1,019,540.80 [$999,150/(1-deflation rate)]. Hence, while the nominal after-tax yield is a -0.085%, the real after-tax return is just over +1.954% (deflation increases the purchasing power of money).

Notes:
* T-bills actually pay the face value at maturity. Hence, to get a negative yield, one would pay more than the face value in order to get back the face value. The above example is designed to simplify the presentation.

** In practice, capital losses can be carried back 3 years and carried forward five years to offset capital gains. However, that does not mean that they do not generate a tax benefit.

 

[Onion Eater]

An institutional fund pays $1,000,000 for 1-year securities yielding -0.1%.

A small investor of the type Khayembii Communique is probably thinking of could just deposit his money in a non-interest-bearing checking account.

But demand deposits are not insured up to $1M and there may be doubts about the government's ability to reimburse everybody up to the new $250K limit (it used to be $100K) in a timely manner in the event of a general failure of all banks. Also, small investors don't make enough to have to worry about the tax benefits of declaring losses. So Don's example really only applies to large institutional investors.

But, for most people, banks are still safer than stuffing $100 bills under their mattress. People die in home invasions fighting over no more than a few thousand dollars under the mattress. Trust me, the bank is safer.

I'm certainly not going to endorse buying gold coins, cases of 5.56 NATO cartridges, or any of the similar suggestions floating around the internet. This is the United States - not Somalia - things aren't quite that desperate yet.

 

[DeeJayH]

A small investor of the type Khayembii Communique is probably thinking of could just deposit his money in a non-interest-bearing checking account.

But demand deposits are not insured up to $1M and there may be doubts about the government's ability to reimburse everybody up to the new $250K limit (it used to be $100K) in a timely manner in the event of a general failure of all banks. Also, small investors don't make enough to have to worry about the tax benefits of declaring losses. So Don's example really only applies to large institutional investors.

But, for most people, banks are still safer than stuffing $100 bills under their mattress. People die in home invasions fighting over no more than a few thousand dollars under the mattress. Trust me, the bank is safer.

I'm certainly not going to endorse buying gold coins, cases of 5.56 NATO cartridges, or any of the similar suggestions floating around the internet. This is the United States - not Somalia - things aren't quite that desperate yet.

the small investors you speak of, are small because they do not take advantage of every benefit/loophole/trick/etc...

 

[Onion Eater]

Assuming that the institutional fund pays the maximum 15% capital gains tax, it receives a tax benefit of $150.

the small investors you speak of, are small because they do not take advantage of every benefit/loophole/trick/etc...

In Don's example, the institutional investor realized a $150 tax benefit on a $1M investment. If you scale that down to a small investor with $1000, the minimum needed to purchase a T-Bill, his tax benefit would be fifteen cents.

Don't spend it all in one place, DeeJayH!