Run on Treasury Bills Spurred by Subprime Contagion (Update5)
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 0.23 percentage point today to 3.86 percent, after tumbling 0.54 percentage point yesterday. The yield at one point today was 3.73 percent, the lowest since July 2005 and marking the biggest drop in yield since the stock market crashed on Oct. 20, 1987.
Lenders are so concerned about the fallout from rising delinquencies on subprime mortgages that rates on commercial paper have shot up to 5.90 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 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. The amount was the most since it lent $14.87 billion on June 29, and about 70 percent of the securities were Treasury bills. Today, the Fed lent $6.63 billion, with about 32 percent consisting of Treasury bills.
Investors began to seek 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 yesterday seeking comment.
Countrywide tapped an $11.5 billion credit line today to shore up its available cash. The unsecured credit line is with a group of 40 of the world's largest banks, Countrywide said today in a statement distributed by PR Newswire.
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.
`Safe Investments'
``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.
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 said today that it is seeking an additional C$790 million ($729 million) of emergency funds after failing to sell any notes yesterday.
`Premature'
The perceived risk of owning Countrywide's bonds increased yesterday, according to prices of credit-default swaps.
Credit-default swaps on Countrywide soared as much as 425 basis points to 1,025 basis points today before easing to 705 basis points as of 12:25 p.m. in New York, according to broker Phoenix Partners Group in New York.
That means the cost to protect $10 million of the company's debt against default touched $1.025 million. That protection now costs $705,000. One-year contracts rose even higher, to as much as 1,420 basis points, according to CMA Datavision.
Credit-default swaps are used by investors to speculate on a company's ability to repay its debt. An increase indicates 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.'' |
