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How short-term treasuries can earn a negative yield

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January 15, 2009 – Comments (1)

You may have already seen an article on this, but I haven't, so here it is.

How can short-term treasuries earn a negative yield? Why don't people stop buying them?

The simple answer: high demand via money market accounts.

The detailed answer:

When a person sells a stock, typically the proceeds are "swept" into a money market account, which historically might yield about 1-3% APY, and was structured as a fund of 30-day treasuries, and other relatively liquid assets that would hold their value well at $1 = $1. The holding of value was considered a sacred concern, for fear of "breaking the buck" - a money market account suffering a capital loss. That was the top concern for money market accounts from the outset.

Then an economic crisis hits and everybody panics, they start selling their stocks. As the brokerages sweep all this capital into money markets, and as other short-term liquid assets seem more and more likely to fail, 30-day treasuries get bid higher and higher, even as the Fed is cutting interest rates to 0.25 or whatever. This is like a perfect storm, dragging the yield below 0.

What I don't know is how money market managers will deal with this situation. Will they pay the difference out of pocket? Will they charge a fee to cover the difference, essentially breaking the buck? My guess is option #3 - they will bribe congress and Obama with campaign contributions to use tax receipts to bail them out.

1 Comments – Post Your Own

#1) On January 15, 2009 at 12:26 PM, FleaBagger (28.84) wrote:

Was that obvious? I don't know anymore....

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