Fear is rising at the shortest end of the Treasuries market

10/08/2013 2:25 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The bond market action today is at the very shortest end of the Treasury curve as bond traders and investors work to reduce their immediate exposure to a potential loss of liquidity in short Treasury bills if the U.S. government should miss an interest payment in the last weeks of October.

The yield curve in the Treasury market from 3 months to 30 years looks relatively normal today but for the first time ever—according to Briefing.com—the one-month Treasury yields more than one-month LIBOR at 0.29% for the Treasury and 0.17% for LIBOR.

The likely cause, Briefing notes, is money market managers moving to reduce their risk—by buying six-month Treasuries, for example, and selling one-month paper--in case the short-term Treasury market seizes up in the uncertainly following a missed payment by the United States.

In that case no one knows how Treasury bills would trade. Interest rates would climb, of course, but would the bills trade at all given the uncertainties of their exact legal status after a missed payment. The mere possibility that money market funds wouldn’t be able to sell their one-month bills is a huge negative given the necessity of money market managers to meet short-term withdrawals.

The last thing a manager wants to do is to be unable to meet a demand for cash from a money market investor.

And it’s almost certain that even a technical default would lead to an increase in withdrawals from money market vehicles.

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