On Tuesday, Reuters published, “The un-terrifying Treasury bill market,” in which the author, Felix Salmon, attempted to dismiss concerns about the recent spike in Treasury bill rates by pointing out just how small the price move actually was for the bills. He says, “If you look at the actual price action in Treasury bills, then, [the recent movement] isn’t terrifying in the slightest.” Additionally, Salmon provides the following example:
“And here’s the reality: let’s say the yield on your $1,000 bill soars to a terrifying 0.446% from a relatively benign 0.184%. That means the price of your bill has plunged from $1,000.04 all the way to $999.88. You’ve lost a whole 16 cents — or 0.016%.”
Here’s another glimpse of reality: Treasury bills are viewed by the financial community as cash. Put differently, in today’s financial realities, the financial community expects T-bills to be worth 100 cents-on-the-dollar on the date of maturity. It is true that T-bills posted as collateral will have very small haircuts applied. But when discussing T-bills maturing in the next couple of weeks, financial markets participants, under normal conditions, would have the confidence that those T-bills are as good as cash—worth 100 cents-on-the-dollar. In that light, the magnitude of the recent move in T-bills is noteworthy and not something to be casually dismissed.
Salmon far too easily mocks the price move of a financial instrument that is very close to maturity, doesn’t normally behave the way it’s recently behaved, and that investors depend on to be worth 100 cents-on-the-dollar in just a matter of days. So Mr. Salmon, if such a price move in an instrument viewed as cash is no big deal, then I have a proposition for you:
I will buy from you as many lots of $1,000 as you are willing to sell to me (up to the amount I can afford to purchase) for the purchase price of $999.88 (this price is pulled from your example, noted above). Stated differently, you give me $1,000, and I will give you back $999.88. Do we have a deal?
On a final note, I would also like to briefly address this comment from Salmon’s article: “there’s not even any real evidence that what we’re looking at here reflects credit risk being abruptly inserted into the interest-rate market.” Perhaps Salmon is waiting for the institutions selling those T-bills to come out and plainly explain why they are doing it (not going to happen). But while he is waiting for that, I would like to better help readers understand what is going on. While pretty much everyone in the financial press keeps focusing on the fact that there is plenty of revenue to pay interest on the debt, the biggest threat of default comes from institutions deciding not to rollover debt that is maturing in the coming weeks.
As former Secretary of the Treasury Timothy Geithner explained in a June 28, 2011 letter to then U.S. Senator Jim DeMint, “Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United States would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities. In fact, some market participants have already indicated that they would be disinclined to do so.” [emphasis added] If some market participants were disinclined to do so in 2011, I think it is reasonable to assume there are some that feel the same way today.
My base case is still that a debt default will be avoided. In that regard, I share the same view as pretty much everyone who writes about financial-related matters. But I also think the financial press can do a much better job of painting a more realistic picture of the current state of things.
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