The T-Bill Mystery Solved?

by Dave Forest
July 2, 2010

I mentioned a couple of weeks ago about some odd happenings in the T-Bill

market.

Between June 1 and 14, yields on the four-week Treasury fell off a cliff.

Diving from 0.15% to as low as 0.02%. An 87% decrease in a very short

period of time.

Other short-term securities also saw yields plunge. The 13-week T-Bill dropped

56%. The 26-week bill fell 32%.

The upshot being that a lot of people suddenly started buying short-dated paper.

Driving up the bid price and bringing down yields.

The question is, why?

After I sent out the original piece, Michael Schuss (who may be the only person

I know tracking more data than I am) wrote in with an interesting explanation.

Window dressing.

The timing of the buying in Treasuries corresponded with the end of the second

quarter. Michael suggested that investment funds (and other like entities) might

be selling losing investments and moving the money temporarily into T-Bills.

This is indeed common practice amongst funds. Managers are often required to

report losses/gains on current holdings in the portfolio at the end of each quarter.

If a stock, bond or other investment is showing a particularly egregious loss, funds sometimes sell it before quarter-end so as to avoid admitting just how far in the red they are.

This week, it appears as if Michael's theory has some weight. As the chart above

shows, yields on the 4-week bill leapt 325% between Monday and Wednesday.

Now back to pre-sell off levels. Other bills have similarly rebounded.

Stock purchases completed on these dates would not settle for a few days.

Putting them squarely into the third quarter. Thus, the rise in yields could

correspond to funds cycling their money out of T-bills and back into riskier

investments, now with 90 days until their next required reporting.

The timing is striking.

The interesting thing is that this didn't happen at the end of the first quarter.

Was Q2 particularly rough for funds? Could this be a sign of more troubles

emerging in the financial system?

Here's to keeping it on the books,

Dave Forest