U.S. Treasury bill rates fall closer to zero

Fri Dec 14, 2012 4:56pm EST

* One-month T-bill rate touch lowest since January

* Possible end to a bank insurance program feeds bids

* "Fiscal cliff" worries add safe haven demand for T-bills

By Richard Leong

NEW YORK, Dec 14 (Reuters) - Interest rates on U.S. one-month Treasury bills moved closer to zero on Friday on demand stoked by the likelihood that a federal insurance program covering large bank accounts will not be renewed by the end of the year.

Safe-haven demand on worries about the absence of a budget deal in Washington has also driven down rates on ultra-short dated U.S. government debt in recent weeks, analysts said.

On Thursday, the Senate failed to overcome a procedural challenge raised by Republicans against a bill to extend the Transaction Account Guarantee (TAG) program for two years.

The TAG program, set to expire on Dec. 31, was created during the global credit crisis to provide unlimited guarantees for non-interest bearing checking accounts. Prior to TAG, the Federal Deposit Insurance Corp covered individual accounts up to $250,000.

"The decline in bill rates can be attributed primarily to the Senate's failure to pass an extension of (TAG)," Tony Crescenzi, portfolio manager at PIMCO wrote in a note on Friday.

In late trading, the interest rate on one-month Treasury bills was at 1 basis point after touching 0.25 basis point earlier, the lowest since January. It closed at 2.25 basis points on Thursday.

The one-month T-bill rate fell for a third consecutive week.

In late November, it was just shy of 16 basis points, which was the highest since early August 2011 during the fight in Washington over raising the federal debt ceiling.

Even if the Senate approved the TAG extension bill, it would be tough to pass it in the House of Representatives, analysts said.

Still, there might be a remote chance TAG could survive if the proposed extension was attached to a major law such as a budget deal to avert the "fiscal cliff."

The "fiscal cliff" is a package of automatic tax increases and spending cuts set to begin early next year if U.S. President Barack Obama and Congress fail to reach a budget deal before the year-end. Economists have warned the fiscal contraction will cause a recession.

Without TAG, analysts forecast that corporate treasurers and cash managers will begin to withdraw funds from checking accounts and spread the money among T-bills, money market mutual funds and other safe assets.

The forecast decline in cash from TAG accounts among analysts ranged from $200 billion to $600 billion.

There was roughly $1.5 trillion in TAG accounts at the end of third quarter, according to FDIC data.

The withdrawal from large checking accounts might still be modest because most investors prefer the relative safety of a bank, said Alex Roever, short-term fixed income strategist at J.P. Morgan Securities in New York.

"At least they know where their money is. Most of the money will stay in the banking system," he said.

The shift into other money market securities was expected to lower the interest rates on them, resulting in cheaper loans for companies and governments, analyst said.

In addition to the likely end of TAG, worries about the "fiscal cliff," year-end build in cash holdings and the expiration of the Federal Reserve's "Operation Twist" program will exert downward pressure on T-bill rates, analysts said.

The three-month T-bill rate fell 2 basis points to 3.25 basis points on Friday, while the six-month rate dipped half a basis point to 9.5 basis point.

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