T-Bills

With U.S. T-bill yields hovering near zero, today's weekly bill auctions may attract more general market attention than usual. Here is what is going on: due to the approaching debt ceiling, the US debt managers have reduced T-bill sales. At the same time, the demand for short-term paper is great.

First, many medium term investors want to stay fairly liquid, as the liquidity preference has risen given the financial crisis, and because they expect interest rates to rise.

Second, the government's guarantee on money market funds ended last month and while the commercial paper market has re-opened, outstanding CP is still $1 trillion lower than where it was before the crisis. Last week's $30 bln three-month bill sale drew nearly four times more bids. Bids for the $31 bln of 6-month bills were slightly less but with a bid-cover of 3.65 it was still very strong. These bid-cover ratios are historically high. Today the US Treasury sells $30 bln 3-month and $31 bln six month bills and $44 bln of two-year notes. Demand for bills and short coupons is expected to remain strong. Last week, the yield on 2-year notes fell to the lowest level of the year. The discount to Germany has widened 26 bp over the past month, 22 bp of which over has occurred over the past week. In the shorter term, Euribor and Eurodollar spreads for June and Dec next year have widened to new highs as well. This is a poor backdrop for the dollar as short-term operators are paid more to be short the greenback.