Safety First: Get Used to Negative T-Bill Yields

The 3-month T-bill yield closed at 0.03 percent on Wednesday 9/17/2008. This means if you purchased treasury bills at this rate, Uncle Sam would’ve paid you 75 cents for every $10,000 that you loaned him for 90 days, or $3.00 for the year. According to a treasury trader at RBC Capital Markets, they may have even traded negative on that day.

As if these low treasury bill rates are not insane enough, are people really going to pay the Fed to lend them money? Not a chance, you may think. Well, hold on… not so fast.

A common mistake many traders and investors make is anchoring to a conclusion on what they themselves would or wouldn’t do and assuming it to be a concrete fact.

The markets are made up of many types of participants and they all have reasons behind their actions. To be a successful trader or investor, you need to be able to foresee the other players’ moves or you may find yourself bamboozled and poorer.

Whether bills are discounted at 1% or 0.01% is really irrelevant… at these rates no one is buying them for yield. They are buying them for safety. And with the debate over the $700 billion bail-out package and the failure of several banks, safety is a huge concern today.

For example, let’s assume you are raising money for a venture fund that is going to buy distressed real estate. You are in the money raising stage and are waiting for signs of a real estate market bottom. To date, you raised $750 million and your target is $1 billion. You plan on buying properties only in the US, so you don’t have any currency exposure.

How would you like to explain to your investors that you lost all… or a large percentage of their capital, which you parked in a money market that was paying 100 basis points over treasury bills? No way… when you see your sign to swoop in and buy the properties, you better have your investors’ capital to do so.

This is just one of many examples of the need to keep cash safe. Institutional investors, hedge funds, futures traders and even mutual funds need to keep cash on hand to take advantage of opportunities in the markets. In these situations, the current priority is to have your cash ready when needed. Whether you are receiving or paying 1 percent on T-bills is irrelevant and a small price to pay for safety.