Treasury-Bill Yield Tips Into Negative Territory

Short-term debt trading at negative yields was essentially unheard of before the 2008 financial crisis. But since then, the condition has cropped up at times of market stress, reflecting extraordinarily expansive central-bank policy and anemic growth in much of the world. Yields on some U.S. bills traded below zero at the end of each of the past three years amid strong demand for liquid assets, according to analysts.

In Germany, the yield on the two-year government bond has traded below zero in recent weeks. Investors there were seeking safety amid Europe's latest brush with slowing growth and dangerously low inflation, even as many global stock-market indexes trade near record highs.

A broader flight to safety on Tuesday also pushed up prices for longer-dated Treasury debt. The U.S.'s benchmark 10-year note rose 9/32 in price, and its yield fell to 2.535%, down from 3% at the start of 2014.

Traders cited a handful of additional reasons for the unusually robust demand for Treasury bills, the government securities that mature in less than a year. Many investment firms are bracing for the end of the third quarter, when regulated firms often boost their holdings of safe assets to make their balance sheets look safer. At the same time, investors continue to favor short-term government debt amid geopolitical turmoil from the Middle East to Ukraine.

"People are scrambling to find a place for short-term cash in a world where high-grade assets are relatively scarce," said Andrew Hollenhorst, U.S. short-term interest-rate strategist at Citigroup Global Markets Inc. in New York.

Demand for Treasury bills grew after the Fed, at the mid-September meeting of the Federal Open Market Committee, capped the use of its so-called reverse repo facility, which are agreements in which the Fed takes cash from money-market mutual funds, corporations and others and exchanges it overnight for government securities that the Fed offers to repurchase at a slightly higher price the next day. Firms have been using the facility to slightly increase the returns on their cash holdings.

Last week, the Fed announced it was worried about the growing reliance on the program and said it would cap the facility for the first time, at $300 billion.

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Strong demand for Treasurys followed the Federal Reserve's decision to cap a popular lending program.DPA/Zuma Press

Before the cap was announced, J.P. Morgan Chase JPM +0.68% & Co. analysts predicted "a massive surge" in demand for the Fed facility, saying its use on Sept. 30 could reach $500 billion.Barclays BARC.LN +0.04% PLC projected around $400 billion of demand. Daily usage hit $339 billion at June 30, after averaging $139 billion for the second quarter through June 29.

Peter Yi, who oversees $225 billion in short-duration and money-market fund assets at Northern Trust Corp. NTRS +0.84% in Chicago, said the negative yields on Treasury bills was "mostly due to the Fed changing the parameters of its reverse repo program."

Falling yields aren't a problem confined to Treasury bills: Yields on short-term commercial paper issued by banks and finance companies are declining, too, as investors look to the next-best place to put their money.

Mr. Yi said he had been buying marginally longer-term debt instruments as a substitute for Treasury bills. Among the alternatives he has been looking at: discount notes—short-term debt issued below 100 cents on the dollar that matures at par—and bank commercial paper. "It gives us some supply and helps alleviate some pressure to get some more invested," he said.

While the U.S. economy has gained traction, the eurozone is teetering on the edge of recession, Japan's economy remains tepid and China is slowing down after years of rapid growth.

In Europe in recent weeks, the European Central Bank has cut some of its interest rates below zero, in a bid to jump-start lending in a stagnant economy and fend off fears of deflation, a damaging cycle in which falling prices lead consumers and businesses to hoard cash, further reducing spending. Two-year yields have fallen below zero in Denmark, Finland, Belgium and the Netherlands.

Low yields on European government bonds "are one of myriad factors complicating what [Fed officials] are trying to do," said John Canavan, senior market analyst at Stone & McCarthy Research Associates.

Treasury debt already is in short supply, in part because the U.S. has cut issuance of short-term bills this year as a shrinking fiscal deficit has reduced government-funding needs.

The U.S. sold a one-month bill on Tuesday at a yield of zero, and a sale of two-year Treasury notes drew the strongest demand since February.

"There is a negative feedback loop if the U.S. raises rates too fast,'' said Jim Caron, global fixed-income portfolio manager at Morgan Stanley Investment Management, which had $396 billion assets under management as of June 30. "If data and inflation remain benign, the Fed will be in no hurry to hike rates."

Write to Min Zeng at min.zeng@wsj.com and Katy Burne at katy.burne@wsj.com

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