Investors are so eager to buy Treasury bills that they’re willing to pay the U.S. to hold their money — if only the government would let them.
Rates on one-month bills, which have sporadically traded below zero in the secondary market since 2008, have been negative for weeks amid a supply drought as the Treasury reduces sales to keep the U.S. under its debt limit. Yet Treasury rules don’t permit auctioning new debt at negative rates, a phenomenon seen elsewhere in the world at times of heightened demand that means investors pay the government to hold their cash.
The lowest auction rates can currently go is zero, as they did Tuesday when the government sold three-month bills. Amid the latest Washington standoff over a U.S. debt ceiling accord, the auction rules may be causing the Treasury to forgo some potential income while giving investors lucky enough to get orders filled a chance to flip the securities for a quick profit.
“Treasury officials are more concerned about whether or not the government is going to be funded and if the debt ceiling is going to be lifted,” said Ward McCarthy, chief financial economist in New York at Jefferies Group LLC, one of the 22 primary dealers obligated to bid at the auctions. “The concept of U.S. citizens paying the government instead of earning interest on Treasury debt would be a real political headache.”
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Weekly sales of four-week bills drew record demand in September as the amount offered dropped to $8 billion as of Oct. 6 from $45 billion in July. The Treasury sold $20 billion of three-month bills Tuesday at a rate of zero percent after it sold the securities last week at that rate for the first time.
The Treasury is likely to exhaust measures to stay under the debt ceiling on or about Nov. 5, Treasury Secretary Jacob Lew said in an Oct. 1 letter to House Speaker John Boehner. At that point, the U.S. won’t be able to sell additional debt and may have less than $30 billion of cash. The Treasury’s daily expenditures are as high as $60 billion, he said.