By Caitlin Ostroff and Paul J. Davies
Yields on the safest, short-term Treasurys have settled into negative territory for the first time in more than four years, as investors continue clamoring for cash and safe dollar assets even as some markets show signs of normalization.
The one-month Treasury bill yield closed at minus-0.112% and the three-month bill ended at minus-0.072%, both even lower than Wednesday when they settled below 0% for the first time since late 2015, according to Tradeweb.
"People are desperate for cash-like equivalents," said Sebastien Galy, senior macro strategist at Nordea Asset Management. "The safest thing you can get is Treasurys."
Buying a bond with a negative yield means investors will receive less money back when the debt matures, upending a basic relationship that has ruled financial markets for centuries.
Negative yields on bonds have become commonplace in Europe and Japan, where central banks have used negative policy rates to spur growth. However, the Federal Reserve has all but ruled out using negative rates. Short-term Treasury yields briefly went negative in September 2015, when the U.S. central bank put off a rate increase after an economic slowdown in China shook global markets.
"I don't think we can go much lower," said Gennadiy Goldberg, U.S. rates strategist at TD Securities. "For yields to go lower would imply the Fed would cut rates which the Fed doesn't want to do."
Mr. Goldberg said he expects yields to rise as the Treasury will have to raise money to finance fiscal stimulus measures to combat coronavirus. Typically, when the Treasury needs to raise cash quickly, it floods the markets with short-duration bills rather than longer-dated bonds. He expects that the bill supply for this fiscal year will go up between $700 billion and $1 trillion.
The Fed has taken broad and repeated actions in recent weeks to ease tensions in the financial system. Those steps appear to have improved liquidity, the ease with which one can buy and sell in the market.
But companies and investors, facing a sudden shutdown of many parts of the economy, have been scrambling for cash to cover their costs while revenue and income are disrupted. Short-term Treasurys are, for many investors and corporate treasurers, the closest thing to cash.
The preference for low-risk, cash-like assets has also seen money flood into certain money-market funds that are only allowed to invest in short-term Treasurys and mainly buy bills with maturities of three months or less.
Inflows to government money funds have totaled $315 billion in the past seven days alone, according to Crane Data, a specialist research service. At the same time, prime money funds, which invest in commercial paper and other securities as well as bills, have endured heavy outflows of $60 billion in just the past seven days, equivalent to about 6% of assets.
Prime funds have increasingly been moving their assets into short-term Treasurys too, according to analysts, to ensure they can quickly return cash to clients if asked.
"Inflows into government funds have been astronomical but [Treasury] bill supply has been quite stagnant," said Blake Gwinn, head of front-end rates strategy at NatWest Markets. "Net new bill supply has been only about $50 billion since late February," he said.
These flows and the broad rush for cash have pushed yields on short-term debt down further and faster than those on longer-term bonds.
Write to Caitlin Ostroff at email@example.com and Paul J. Davies at firstname.lastname@example.org
(END) Dow Jones Newswires
March 26, 2020 17:24 ET (21:24 GMT)
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