I'm too low for zero
I'm on a losing streak
I've got myself in a bad patch lately
I can't seem to get much sleep
-Elton John
A lot of investors are losing sleep these days over zero percent
yields on their Treasury holdings. It seems we have found the
trigger point between fear and greed.
While there are certainly other positive-yielding investment
choices that still make sense - government funds along with the
newly created TLGP debt, for example - many investors don't have
the time or energy required to investigate and defend these
strategies on an ongoing basis. Or, perhaps, there are more
pressing matters that need to be addressed.
It is amazing to consider the total supply of T-bills (those
Treasuries with original maturities of one year or less)
outstanding has risen 79 percent from $1.1 trillion to $2.0
trillion in just the last six months. And over the same period,
yields have dropped 184 basis points. Macroeconomics 101 taught us
the laws of supply and demand, but the demand curve in this market
has shifted off the page to the right so that seemingly no amount
of increased supply will satisfy.
The government's goal of convincing investors that everything is
"government guaranteed" is proving lofty at best.
Enter the aforementioned TLGP or Temporary Liquidity Guarantee
Program. Under this program, banks and certain financial
institutions may issue debt in the form of commercial paper,
corporate bonds and other vehicles that are 100-percent guaranteed
by the FDIC with a written
"full
faith and credit of the U.S. Government" statement
included.
This program will allow firms like Citibank, Morgan Stanley and GE
to raise funds in the marketplace and at the same time allow for
peace of mind among the investors. This is the silver bullet that
will kill zero percent Treasury rates.
Though the program is currently in place, issuers have been slow to
participate primarily due to the original fee structure which was
considered excessive. However, in the past two weeks, 12 issuers
have entered this market and more are expected to enter soon. In
addition, many investors are considering these new securities as
government substitutes and participating regardless of the actual
issuer.
As investors learn more about this product and issuers come to
market, it is clear funds will begin to flow from Treasuries.
Of course, TLGP securities are not right for everyone. But then,
there's always the demand deposit account (DDA). Sure, it pays the
same as a Treasury (zero!), but you don't have the market risk
should you need your funds sooner than you'd planned.
Today, TLGP securities have a yield advantage over Treasuries that
is only 20 to 35 basis points, but assuming I am doing the math
correctly, that is an infinite percentage pickup in yield for what
can be deemed the same credit risk. Certainly a bargain for those
weary-eyed CFO's concerned about low yields on their investment
portfolios.
The Markets
Treasury yields dropped slightly for the week. The yield on
two-year Treasury notes opened on Monday at 0.94 percent, but fell
18 basis points to 0.76 percent by the end of Friday. Demand for
short-term Treasury bills remains strong, with three-month issues
yielding only one basis point.
Key Developments
The labor sector continues to weaken as unemployment initial claims
rose to 573K in the week ended December 6. This was the highest
level in 26 years. Hiring has been very soft and layoffs continue
to mount as the economic slowdown is forcing employers to reduce
headcount.
Headline Producer Price Index (month over month) plunged 2.2
percent in November, after dropping 2.8 percent in October. The
decline was led mostly by lower energy costs, with gasoline
expenses plunging 25.7 percent in November. Core PPI, excluding
food and energy, rose 0.1 percent for the month.
Advance retail sales fell 1.8 percent in November, the fifth
consecutive month of decline. With growing job losses, consumers
have been reducing their spending. It is expected that spending
will continue to retreat in December, despite the increased
discounts from department stores to draw in more shoppers.