Aug 20 2007
GET OFF OF MY TREASURY BILLS!
SHOO! GO AWAY! GO BACK TO YOUR PIECE OF CRAP CDOS AND CORPORATE DEBT!
The yields on the 1 month and 3 month treasury bills fell like a rock today. Look at these 3-year charts.
I own a Treasury Money Market fund and I guess the action in the yield in the last few days means that the net asset value of the money market fund should rise above $1 since falling yield means a rise in value of the treasury bill. However, since it is a money market fund, the net asset value is almost always $1 and such a dislocation in the bond market almost never happens so I have no idea how Vanguard will handle this. I’m guessing either I get a fatter distribution to maintain the net asset value at $1 or the net asset value actually becomes greater than $1. I don’t really know.
However, I am disappointed in move in yield because it means that a few months down the road, my fund distributions will drop like a rock since the fund buys short term treasury bills. I may have to move my money to longer term treasury debt such as a Short-Term Treasury Fund which has an average duration of 2.2 years. If the yield on that also falls like a rock, I think I’ll have to start dumping US dollars and start buying some foreign currency.
Why did the yields for the 1 month and 3 month treasury bills drop like a rock? I’m not sure what’s going on in the market but it seems like all of a sudden investors have a huge aversion to risk so they bid up the price of the treasury bills and sent the yield crashing down.
Now that makes me wonder, if people are crazy enough to buy treasury bills like crazy, where did their money come from? What asset are they selling to buy treasury bills? Or what asset are they NOT buying anymore? Are people shying away from mortgage backed securities that yield 5%? Are they crazy? How could they be buying treasury bills that yield 3% when they can buy a mortgage backed security that yields 5%? Could it be that the default rate on the mortgage backed securities is so high that the difference in yield makes up for the default rate? If that is the case, then we have armageddon in the credit market right now. The whole banking system has the potential to fail. FDIC insurance no longer means anything.
I have no idea how the stock market has not reacted to this yet because this is horrible news. The yield on treasury bills may be falling but that means that the yield for all other forms of debt are going through the roof. Rate cut? What rate cut? All companies are going to have much higher borrowing costs going forward because investors aren’t willing to buy risky debt anymore.