Three-Month Treasury Bills Lowest Since Auctions Began in 1929

Bloomberg writes:

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 worst financial crisis since the Great Depression.The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929.

Why are treasuries at their lowest-ever rate?

Some of it is certainly because investors fear any other asset class except cash, given the massive economic crisis we face.

But analysts also point out other contributing factors:

For example, bond expert John Jansen says:

Central banks have flooded the system with money and the system is awash in a surfeit of liquidity. That money is searching for a home. [GW's note: in other words, banks are squirreling away their bailout funds in treasuries.]

I also think that very large chunks of money which left the stock market and money funds when Lehman crumbled is in government-only funds and that creates a tremendous demand for bills.

December is always a month with bill demand as the process of sanitizing balance sheets for year-end examination is always a concern. With the trials and tribulations in the financial markets this year, that demand will be orders of magnitude larger than normal.

One last point, which a veteran salesman and former portfolio manager made to me, is that the money raised by financial institutions via the FDIC bonds is exacerbating the situation. The borrowers do not need that money now. They are defeasing maturities which will arise in 2009. So that money will sit in the short market until it is needed next year.

Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve, says "It’s the year-end factor . . . . Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

Are these guys right, or will the short-term treasury market continue to crash due to the grim economy? Only time will tell.