Run on U.S. Treasury Bills Spurred by Subprime Paper Contagion
By Daniel Kruger
Aug. 16 (Bloomberg) -- Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt.
The yield on the three-month Treasury bill fell 0.54 percentage point yesterday to 4.09 percent, the lowest since 2005. It was the biggest single-day decline since Oct. 13, 1989, when the Dow Jones Industrial Average tumbled 6.9 percent, and exceeded the 0.39 percentage point drop in the aftermath of the Sept. 11, 2001, terrorist attacks.
Lenders are so concerned about the fallout from rising delinquencies on subprime mortgages that rates on commercial paper have shot up to 5.83 percent from 5.36 percent a month ago, data compiled by the Federal Reserve show. Commercial paper is debt due in nine months or less and is bought by money-market funds such as those managed by Boston-based Fidelity Management & Research and Vanguard Group Inc. in Valley Forge, Pennsylvania.
Money funds that had been buying corporate commercial paper ``have all switched to the safe side,'' said Glen Capelo, a trader at RBS Greenwich Capital in Greenwich, Connecticut, one of 21 firms known as primary dealers that trade directly with the Fed. ``I'm sure their managers have all given them a Treasury-only mandate, at least until the dust settles.''
Dwindling Supply
The run on the government's shortest maturity debt comes as the Treasury Department sells fewer of the securities because of an unexpected increase in tax receipts. The budget deficit may narrow by 39 percent to $150 billion this fiscal year, the Congressional Budget Office said May 4.
The supply of bills, which peaked in March 2005 at $1.06 trillion, fell to $892.1 billion at the end of July. Bills account for about 21 percent of the Treasury's $4.37 trillion of debt outstanding, the smallest share since October 2000.
``Supply and demand are out of balance,'' said Capelo.
The government may auction a large, short-term cash management bill to add supply to meet rising demand, he said. The Fed yesterday lent $10.88 billion of bills and notes through its System Open Market Account, where dealers can borrow issues that are scarce in the regular repo, or repurchase, market. About 70 percent of the securities were Treasury bills. The amount was the most since it lent $14.87 billion on June 29.
Investors sought out bills yesterday after Merrill Lynch & Co., the world's biggest brokerage, lowered its rating on Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, to ``sell'' from ``buy'' and raised the possibility of bankruptcy. That would happen if creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, New York-based Merrill Lynch said.
Countrywide Rates
Rates for Countrywide's overnight corporate commercial paper were quoted yesterday at 6 percent and 6.5 percent for 30 days, according to Denise Latchford, director of money funds for American Century Investments in Mountain View, California.
Amber Cousins, a spokeswoman for Countrywide, didn't return calls seeking comment. Last week, Countrywide said it had access to about $187 billion in credit, and Standard & Poor's yesterday maintained the credit ratings on more than 450 money-market funds around the world.
``Money funds are looking for more liquid and more safe investments and the bill market is at the top of the list,'' said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment-banking arm of Canada's biggest lender.
Difficulties in finding buyers for some types of maturing commercial paper may lead companies to ``dump'' $50 billion to $75 billion of assets on the market, and shift the financing or ownership of as much as $125 billion of debt to banks and other institutions, fixed-income analysts at UBS AG said in an Aug. 14 report. Zurich-based UBS is Europe's largest bank.
No Buyers
The Countrywide downgrade came a day after Toronto-based Coventree Inc., the Canadian investment bank, sought emergency funding as investors declined to buy all of its asset-backed debt that was maturing. Coventree yesterday said it found buyers for C$600 million ($558 million) of asset-backed commercial paper.
The perceived risk of owning Countrywide's bonds increased yesterday, according to prices of credit-default swaps.
Countrywide five-year credit swaps climbed as much as 145 basis points to 520 basis points, according to broker Phoenix Partners Group in New York. That means it costs about $520,000 to protect the company's debt against default.
Credit-default swaps are used by investors to speculate on a company's ability to repay its debt. An increase indicates a deterioration in credit quality.
Federal Reserve Bank of St. Louis President William Poole said late yesterday that there is no sign that the subprime- mortgage rout is harming the broader economy and an interest- rate cut isn't yet needed.
``It's premature to say that this upset in the market is changing the course of the economy in any fundamental way,'' he said in an interview in the bank's boardroom. ``Obviously, there could be an impact, but we have to rely on some real evidence.''
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net
Last Updated: August 16, 2007 00:12 EDT |
