The T-Bill Renaissance - Stratfor

An excellent and timely briefing by Stratfor re recent market developments.
-- David M Gordon / The Deipnosophist
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December 10, 2008 1731 GMT

United States: The T-Bill Renaissance

Summary
As the financial crisis forces investors around the globe to liquidate risky investments, the U.S. Treasury has benefited from its traditional role as a safe haven for capital. While the increasing demand for U.S. Treasury bills allows the U.S. wide berth for addressing the crisis, most other markets are being starved for desperately needed liquidity.

Analysis
A U.S. Treasury bill auction Dec. 9 resulted in investors eagerly seeking zero percent and even negative yields. Put simply, investors were willing to lock in a loss on their investment in order to guarantee that they would get most of their money back. The higher the demand for a bond, the less the issuer has to pay in interest.

In the world of financial trading, this is just about as desperate as traders get. As asset values collapse, those investing with borrowed money are forced to cover losses by either posting more collateral out of pocket or selling off assets – often at drastically reduced prices. This process, known as deleveraging, has investors of most stripes worried about further market collapse. Thus, even market participants who have not employed dramatic leverage have pulled their money out of most types of investments and plunged it into what is broadly considered the safest investment in the world: U.S. Treasury bills.

Since the Lehman Brothers failure, the realization has dawned that even the best and brightest are vulnerable to the deleveraging process — and the absolute last thing standing, no matter the scenario, will be the U.S. government. Ergo, that is the place to stash cash. For many investors, such as the governments of China and Japan, this is not a course of action taken out of panic — this is what they done for decades. Government money managers in foreign states have long been the largest purchasers of Treasury bills; they regularly find low returns in U.S. government debt to be much safer than investments in their own countries.

In some ways this is phenomenal news for the U.S. government's ability to deal with the financial crisis. If investors not just across the nation but across the world are shoving their money at the U.S. government and not demanding any return at all, the U.S. government can in essence borrow nearly limitless amounts of money to fund its liquidity injections, bailouts and other spending at near-zero interest rates. The U.S. federal deficit rang in at $455 billion for 2008, and as the U.S. pursues further bailouts and stimulus spending, it should race past the $1 trillion mark in 2009. With respect to the U.S. continuing to service its debt, the enormous demand for its bonds is good news (that is, assuming it can come to terms with a new $1 trillion of debt).

Of course the fear that this development represents is not good at all. As long as investors are too scared to put their money into anything but Treasury bills, there will be a shortage of funds available for the sort of pursuits that would get the economy going. The result is a broad seizing up of the lending and credit system that complicates everything from a mortgage to a car loan to a corporate bond issue. So while the government may find it easy to finance its efforts, the scope of problems that it must attempt to mitigate has become truly towering.

And that is by no means the worst of it. For while the U.S. government is certainly going to see this as a silver lining to the growing economic storm clouds, the news should inject absolute horror into the rest of the world. Money is pouring into the United States from all directions, leaving most global markets high and dry. So while Treasury bill yields are slimming down to zero, the rates on bonds — both government and corporate — in the rest of the world are going nowhere but up. The United States at least has the option of using rampant government spending as a means of kick-starting other sorts of economic activity, but in the rest of the world all trains leave for Washington.