Return of the 0% Treasury Bill Sale Yield as Supply Shrinks

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They’re back.

For the first time since the pandemic sent shocks through the financial system almost a year ago, Treasury bill auctions are set to draw yields of 0%. That is the lowest rate the U.S. government is prepared to accept in sales of securities maturing within a year.

The $30 billion four-week and $35 billion eight-week bill auctions scheduled for Thursday are likely to be the first since March -- when anxious investors were pouring cash into money-market funds -- to draw the highest accepted price of 100 cents on the dollar, giving buyers a yield of 0%. Thirty-day bills currently yield around 2.5 basis points.

Return of the 0% Treasury Bill Sale Yield as Supply Shrinks

This time, the upward pressure on prices is coming from the Treasury Department’s decision to start issuing fewer bills as it makes plans to draw down its near-record $1.6 trillion cash balance to cover expenses and comply with the possible debt-ceiling reinstatement. Last week’s quarterly refunding announcement included plans to halt sales of 15- and 22-week cash management bills, or CMBs, which became a regular fixture of its borrowing program in the past year, after this week’s.

The supply-demand imbalance combined with the Federal Reserve’s commitment to keeping its policy rate at zero until the economy recovers from the pandemic means that 0% bill auctions are likely to become the norm.

“If it doesn’t happen this week, it definitely will next week,” said Jefferies economist Thomas Simons. “Once the Wednesday CMBs are gone, then it’s zero for sure.”

Treasury bills are normally sold at a discount to face value, giving the buyer a yield that reflects the difference. Despite several episodes since 2011 of Treasury bills trading at negative yields in the secondary market -- meaning at prices higher than 100 cents on the dollar -- the government hasn’t yet begun accepting those prices at auctions.

It’s a conundrum the Treasury Department has wrestled with, as it effectively represents money left on the table, which dealers are able to scoop up by re-selling bills obtained at auction to customers willing to pay more. Treasury bills that mature between this week and April 1 are within 3.5 basis points of zero, and ones that already matured this month traded at negative yields in their final weeks.

While Treasury debt managers have said they may increase the auction size of “one or more” of its remaining offerings to “moderate the pace of decline” in the aggregate supply of bills outstanding, their cash-balance forecasts of $800 billion by March 31 and $500 billion by mid-year should ensure a steady stream of 0%-yielding bill auctions.

“I haven’t found anything yet to dissuade me from the supply/demand view,” Simons said. “Yields are going to be locked at zero for awhile.”

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