Dollars and Jens
Tuesday, August 21, 2007
more notes from the front
Yields on short-term treasuries rose today:
The three-month bill yield climbed 0.48 percentage point to 3.57 percent at 4:28 p.m., rising for the first day since Aug. 13. The increase is the biggest since Dec. 26, 2000. Yields fell 0.66 percentage point yesterday, the most since the stock market crash of October 1987 as money-market funds dumped asset-backed commercial paper for the shortest-maturity government debt.

The Treasury today sold $32 billion of four-week bills, the largest amount since at least July 2001. The bills were sold at a high discount rate of 4.75 percent. The one-month bill yield fell as low as 1.272 percent yesterday, and was about 2.6 percent before the auction. In a sign of weak demand, the government received $1.11 in bids for each $1 sold, the lowest since at least July 2001.
In fact, I was left with the impression the size of the auction — of which $18 billion was needed to roll maturing debt — was increased in light of recent demand for the issue. I wonder whether they should incorporate a reserve bid into the auctions, at least above a certain size.
The Federal Reserve Bank of New York cut the fee bond dealers pay to borrow its Treasuries, in a bid to ease a shortage in the market for loans backed by the securities.


The New York Fed cut its so-called minimum fee rate to a record low 0.5 percent from 1 percent, saying in a statement that the move is ``temporary.''

"We are doing it to provide additional liquidity to the Treasury financing market,'' said Andrew Williams, a spokesman for the New York Fed. He said the rate was the lowest in the history of the program, which has existed in its current form since 1999. The New York Fed last lowered the fee rate on June 26, 2003, the day after policy makers cut their target overnight rate to a four-decade low of 1 percent.
In fact, I hadn't known it wasn't still 1.5%.

Incidentally, here's why I'm not buying the full-fledged flight-to-quality story:In blue is an ETF that follows the S&P 500. In red is an ETF that follows junk bonds. In a broad flight to quality, these should be staggering downward. (In the sort of flight-to-quality indicated by short term treasuries, they should be sprawled naked passed out on the floor.)

The commercial paper markets, as I understand it, are still a bit illiquid, but a number of companies have successfully placed bond issues in the past couple days. I expect there's some widespread credit concern, just as there was two and three weeks ago. The abject panic seems to be localized, though.

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