Monday, August 20, 2007

90 DAY BILL YIELD COLLAPSES

Yields on U.S. Treasury bills fell the greatest amount in almost two decades. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S.

The three-month Treasury bill yield fell 0.66 percentage point to 3.09 percent as of 5:06 p.m. Monday August 20, in New York. This represents the most decline since Oct. 20, 1987, when the yield fell 85 basis points on the day the stock market crashed, and eclipses the drop of 39 basis points on Sept. 13, 2001, the day the Treasury market reopened after the attacks. The yield has fallen from 4.69 percent on Aug. 13. The bills yielded about 7 percent in mid-October 1987 and 3.2 percent in the days before the September 2001 attacks.

Money market funds, considered among the safest instruments, have seen redemptions based on concern that money funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.

Institutional investors added $39.7 billion from Aug. 14 to Aug. 17 to government securities only money market funds, according to Connie Bugbee, managing editor of the Money Fund Report newsletter in Westborough, Massachusetts.

The Federal Reserve Bank of New York said in a statement it won't re-invest the $5 billion of Treasury bill holdings maturing on Aug. 23 through its System Open Market Account to give it ``greater flexibility'' to manage reserves. It is the first time the Fed redeemed the bills since the 2001 terrorist attacks.

Will the next move by the Fed in September be a cut of 25 basis points, 50 basis points or surprise the markets and leave interest rates alone?

The markets have priced in a 75% chance of a downward move of 25 basis points. Clearly the 90-day T-BILL is well below the current Fed Funds rate of 5.25%. My concern is that as the Fed was increasing interest rates it moved in 25 basis points increments. A move of 50 basis points I think would spook the markets that the Fed is panicked about the risk to the economy.

As I said on Friday I was concerned about the yield on he 90 day T-Bill in such a strong recovery. I’m more concerned today at just over 3%.

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