What Zero Yield in Treasury Bills Signal for Currencies

December 9, 2008

Although currency and stock traders can’t figure out whether this is a bottom or a pause before more losses, the sentiment in the bond market is very negative.

For the first time since the US Treasury started selling 4 week T-bills in 2001, the yield hit zero. In other words, bond market investors are willing to buy T-bills at a negative real yield, which means that it earns less than cash. This drove the rates on 3 month bills to negative 0.01 percent, reflecting the market’s hunger for safety.

The only reason why anyone would buy Treasury bills at negative real return is if they believe that recession will deepen, driving bond prices higher and yields further below zero.

From my experience, the bond markets tend to have it right which suggests that we may see further losses in the currency and equity markets this week. The only thing that could help would be a bailout for the automakers and even then, the positive impact on investor sentiment may be limited.

Fed fund futures are now pricing in a 98 percent chance that the Federal Reserve will cut interest rates by 75bp to 0.25 percent on December 16th:

Source: Bloomberg

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