Market update: 12 9 08 - 3 month T-Bill yields go negative

You’ll see from the screenshot below that the 3 month T Bill is trading at a yield of -0.01%. This means that if you give the government $1,000,025.56 tomorrow…in three months they’ll give you back $1,000,000 even. Don’t all call me at once to take them up on this deal…I couldn’t handle the call volume.

Fed Funds futures are currently indicating a 100% chance of a 75 basis point cut in the overnight rate which would take us down to 25 bps. Most correspondents are paying far less than the current target rate of 1.00% as it is…I can’t wait to see what they offer when the target rate is down to 25 bps. One small comfort is that Fed will pay you the target rate for funds you deposit with them.

A very attractive alternative to Fed Funds at these levels has been short, high quality corporate paper. There are plenty of financial firms that have paper trading in the secondary market with very short final maturities and very wide spreads to Treasuries.

Issuers like Bank of America, Goldman Sachs, JP Morgan, Morgan Stanley, American Express…these are issuers that are currently issuing FULL FAITH AND CREDIT PAPER via the FDIC program.

This FDIC program presents us with a great opportunity. You can buy secondary paper from these issuers that wasn’t issued under the FDIC plan at much higher yields. Part of the yield difference is attributable to the fact that the secondary pieces do not carry the full faith and credit guaranty. Part of the difference is due to the inefficiencies that popped up in the money markets when the normal buyers in that market ran to the short end of the curve (see the negative yield on the 3 month bill above).

So there are now short maturities available at very wide spreads from issuers that have the US Government propping them up with liquidity injections and new debt guarantees.

As we see these short bonds with A or better credit ratings, government provided capital, and government backing of their new issue debt we have to ask…is it reasonable to believe that the government would do all of this to keep this firm in business, and then let it fail in the next four months?

If you have an interest in seeing short, high quality corporate bonds with high spreads to Treasuries to use as a Fed Funds alternatives just let me know and I can get you on the distribution list.