TREASURIES-Demand for cash sinks bill yields before payrolls

Tue Jul 2, 2013 4:42pm EDT

Related Topics

* Markets awaiting June nonfarm payrolls data on Friday
    * Economists in a Reuters poll see payrolls rising 165,000
    * Payrolls could set the tone for the next few weeks

    By Ellen Freilich
    NEW YORK, July 2 (Reuters) - Interest rates on some Treasury
bills briefly turned negative on Tuesday as investors scrambled
for cash-like assets in case Friday's U.S. payrolls data leads
to volatile trading.
    Negative rates mean the securities are in so much demand
that investors for a short time accepted a return lower than
their principal in order to get hold of the securities.
    Bill rates returned to positive territory, however, as the
day wore on.
    A number of factors contributed to the confluence of demand
for U.S. Treasury bills.
    Higher tax revenue in 2013 combined with federal spending
cuts has led to a smaller amount of short-term government debt 
outstanding, so there is less short-term debt available to
potential buyers, money market economists said.
    Even with less supply, however, several constituencies are
"captive buyers," for short-term U.S. debt, said Robert Tipp,
chief investment strategist at Prudential Fixed Income, with
$400 billion in assets under management, in Newark, New Jersey.
    Central banks, funds with 'Treasury-only' investment
guidelines, and those who need Treasuries to meet collateral
requirements all need short-term U.S. debt, even if the returns
on those securities are unattractive, he said.
    Additional demand for U.S. bills is coming from the need to
park money that has come out of bond and stock funds in the
recent bout of bond and stock market volatility.
    "The money coming out of those funds invariably sits in cash
equivalents as investors try to figure out what the next
long-term home for that money is going to be," Tipp said. "This
pool of liquidity exacerbates that supply/demand imbalance."
    Money market funds also bought T-bills and other ultra
short-term investments to hold cash from recent redemptions from
stock and bond funds, analysts and traders said.
    The downward pressure on short-term rates has not been
limited to the shortest-term securities.
    "The lack of supply (in bills) is pulling those yields down
and that's bringing down yields not only in the bill sector, but
is having some influence (farther out on the yield curve), 
including the two-year note," Tipp said.
    Two-year notes yielded 35 basis points in late trade on
Tuesday, down from 41 basis points a week ago.
    Mike Cullinane, head of Treasuries trading at D.A. Davidson
in St. Petersburg, Florida, said action in the Treasury bill
market was probably a delayed, quarter-end effect.
    "Money funds are likely deploying the cash they have
received due to redemptions from other areas. They are parking
their cash there (T-bills) until the coast is clear," he said.
    Last week's quarter-end also apparently left some dealers
short T-bills and other coupon issues, leaving them to scramble
to cover those trades. Some traders said these dealers were
either unwinding shorts before payrolls, or hoped to slowly
unwind them by borrowing them via repos. 
    In early Tuesday trading, the interest rates on Treasury
bills that mature later this week into late September slipped to
near zero. The T-bill issue due on Sept. 5 was quoted at minus
0.25 basis points to minus 1.25 basis points.
    In late trade, though, three-month Treasury bills yielded 4
basis points; six-month Treasury bills yielded 8 basis points.
    The drop in T-bill rates also led to a decline in interest
rates on repurchase agreements and other money market rates.    
    The rate on overnight repos backed by Treasuries were quoted
at 8 basis points, compared with 11 basis points from late on
Monday. Repo rates backed by three-year notes moved deeper into
negative territory, last trading at minus 35 basis points, while
repos backed by 10-year and 30-year Treasuries traded slightly
below zero early in the session.
    The U.S. Treasury Department sold $30 billion in one-month
T-bills on Tuesday at an interest rate of 1.5 basis points,
matching the level cleared at an one-month bill auction held on
Dec. 18. 
    In contrast, investors were reluctant to take large
positions in longer-dated Treasuries.
    "The market's in a bit of a holding pattern as we await
Friday's employment report," said Ian Lyngen, senior government
bond strategist at CRT Capital Group in Stamford, Connecticut.
    "Given the relevance of the labor market to the near-term
Fed policy decisions, NFP (nonfarm payrolls) will likely set a
tone for the market for the next several weeks," he added.
    The benchmark 10-year Treasury note rose 1/32 
in price to yield 2.474 percent on Tuesday, down slightly from
2.477 percent late on Monday.
    The benchmark 10-year yield reached a 22-month high of 2.67
percent Monday of last week following earlier remarks by U.S.
Federal Reserve Chairman Ben Bernanke, who said the central bank
could slow its asset purchase program later this year.
    Treasuries have since recovered a portion of the lost ground
as some analysts said the selloff was overdone. Fed officials
have also taken pains to point out the bank will not be ready to
raise its key interest rate for quite a while yet.     
    Investors are now eyeing Friday's nonfarm payrolls release
to gauge the health of the labor market. Fed policymakers want
to see the unemployment rate fall to close to 6.5 percent from
its current 7.6 percent, with robust and sustained job growth.
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