March 3, 2021

Uncertainty Driving Treasury Bill Fluctuations

But these are not normal times.

In the last two weeks — and particularly late last week — there were moves in Treasury bill prices that indicated rising worry that the American government might not honor its obligations, or at least might not do so on time.

The worst impact was on bills that come due in August and early September. Prices of bills that mature after that suffered a little, but there seemed to be more confidence that by then the political impasse over raising the debt ceiling would have been resolved.

Of course, a month ago there was great confidence on Wall Street that a resolution would have been reached well before Tuesday, when the Obama administration said the government would otherwise run out of money.

A Treasury bill is simply a promise by the United States government that it will pay $10,000 on a particular date. Under normal circumstances, of course, a bill that matures a month from now would cost a little less than one that matures next week.

But that was not true on Friday. The $10,000 bill that matures this Thursday traded for as little as $9,970.50, a discount of $29.50. But a bill that matures Sept. 29 — eight weeks later — never traded for less than $9,991.50, a discount of $8.50.

Why would anyone pay less for a dollar to be delivered within a week than they would pay for one to be delivered nearly two months later?

The answer is certainty, or a lack thereof.

To many investors in Treasury bills, time is critical. Bills are often held because a company knows it must come up with a large amount of cash on a particular day. If you owe $10,000 this Thursday, then owning a Treasury bill maturing that day would normally mean you were completely covered.

But what if there is a day or two delay? Or a week or two? What if no one will buy it from you on the due date without a significant discount in price? If that means you cannot meet your obligations, you may face a penalty far larger than a few dollars. Do you really want to take that risk?

Some chose not to last week, and that was why prices fell.

The prices seen last week, it should be noted, did not indicate real worries about a default that continues for a substantial period of time. There is, after all, no doubt that the United States can meet its obligations if its government is willing to do so. The question is one of will.

The discounts may seem teeny, and they would be if interest rates were at normal levels. But the Federal Reserve has pushed rates down, and money the world over has flowed to Treasury bills in a flight to safety. They are normally viewed as the very definition of a risk-free investment.

In fact, there have been times when Treasury bills sold for more than face value. That would seem to make no sense, but such bills are sometimes seen as more convenient than cash.

Just two weeks ago, the $10,000 Treasury bill that matures on Aug. 11 traded for $10,000.50. On Friday, it traded for $9,973.50.

When the bills that mature on Thursday were issued in February, the discount was only $8.50, providing an annual interest rate of 0.17 percent. An investor who held that bill for 25 of the 26 weeks, and then sold late last week, ended up with a loss.

That is not supposed to happen with a risk-free investment. But until now, no one feared that Congress would refuse to allow the government to live up to its obligations.

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