When creditors start paying high-quality borrowers to hold on to their money at debt auctions, you know the world is in the midst of an unprecedented debt deflation. The highest quality debt out there still remains that issued by the U.S. Treasury. Rates on 4-week Treasury bills went negative on the secondary market in December of last year. It’s not that we have never seen this before, but that it is occurring in the context of obvious deleveraging concerns in all parts of the world.
Now, the Treasury Borrowing Advisory Committee has unanimously recommended that the Treasury officially allow investors to bid negative rates at bill auctions, and it looks likely this advice will be adopted. Note that the Committee is comprised of the 21 primary dealer financial institutions, so it’s not as if Wall Street is being forced into anything here. As the following Reuters report makes clear, investors are actually clamoring for this option.
“In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.
Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.
Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.
“It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible,” according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.
The European debt crisis and worry about global prospects is fueling investor demand for safe assets like short-term U.S. government debt. Treasury said modifying its auction rules would require overcoming “operational issues” but they were related to accounting rather than to legal questions.
The Treasury has sold four-week bills with a zero percent rate several times in recent months. One-month bills traded with a negative yield on the secondary market in December, according to Reuters data.
Treasury yields this low may also become a long-term fixture in U.S. markets after the Federal Reserve promised to keep borrowing costs exceptionally low until at least late 2014.”
A decision on a policy change could come in May.
We have now reached the stage where the return of capital, rather than return on capital, takes precedence over everything else. The near-term HI advocates will say this development is a clear sign that gold is the only asset worth holding any more, but they are not thinking like the big money investors. The latter not only have investment guidelines to follow, but they also want to stay as liquid as possible and avoid the risk of another 2008-style price collapse across all risk assets, including commodities and precious metals.
The Treasury is simply providing multiple avenues for them to do so, including a proposal for floating rate notes.
“Miller said Treasury also “continues to study the possibility of issuing Floating Rate Notes (FRNs)” and would announce a decision at the May refunding. A Treasury official said the 21 primary dealers who are part of a committee that advises Treasury on market conditions made a strong case in favor of floating rate notes.
The official said that, at this point, it was not looking at the potential issue of ultra-long bonds of 50 years or more and instead preferred the idea of floating-rate notes.
The borrowing advisors felt that a decline in available global high-quality government bonds as well as rising demand for safe assets would make U.S. government-issued floating-rate notes “extremely attractive” to investors.”
The FRNs provide investors a method of preserving capital without exposure to interest rate risk. There is only credit risk, and the primary dealers are correct to point out that the U.S. will enjoy relatively little credit risk in the current global, risk-riddled environment. All of this, of course, is a way to extend the USD-based sovereign debt ponzi for a few more years, and will make the collapse that much more painful when it occurs. For now, though, everyone must pay the global Mafia Don protection money to stay safe from the credit contraction monster.