Something very interesting is going on with Treasuries and the dollar.

[randomness]

There was some worry that, with all the money the Federal government is throwing at banks to keep them afloat a) this mass issuance of debt would flood the markets with Treasury securities, which would force up interest rates because there wouldn't be enough buyers for it and b) that the budget-busting this represents would cause people to flee the dollar for other currencies, driving down its value.

Neither of these things is happening. In fact, quite the opposite.

It's true that there's been a lot of new Federal debt, but such is the scramble for low-risk assets like Treasuries that their prices are now soaring, which drives yields down. At this point, the interest rate on Treasury securities is so low, buying them amounts to a deal where you give money to the Treasury and they promise to give it back, plus a minimal amount of interest. Then again, considering the other possibilities on offer which might not pay you back, that's a pretty good deal right now.

In order to buy Treasury securities, you have to have dollars, so demand for dollars has been strong. And however bad things look here, chaos overseas means that things don't look any better elsewhere. All of this has meant that the dollar is gaining lots of ground on the euro. The euro dropped below $1.35 during the day today, down from around $1.60 in mid-July.

How long will this go on? Who knows? It wasn't really expected to go this way to start with.

Comments

[dianec42.livejournal.com]

Is it possible to look at it another way, namely that we're finally dragging them down with us?

Interesting times...

[r-ness.livejournal.com]

Oh, sure. It's all relative. Although it might be more accurate to say that they fell into the hole with us a while ago, but no one noticed until recently.

[holmes-iv.livejournal.com]

Wiley Coyote the central banker, much?

[quezz.livejournal.com]

I wonder if that is what Paulson is after. That would be so wrong. This sounds similar to something that happened in the Byzantine Empire, except with coin.

Hrm...maybe the Reps are smarter than I thought. Diabolical, but at least clued into their evil. Still won't vote for 'em though.

[babasyzygy.livejournal.com]

Cool - maybe it's a good time to go to Amsterdam now. Yes, that's right - an Austin, TX music festival in Amsterdam.

[drwex]

T Bills broke the buck a while back - I wasn't aware they'd bounced back since.

There's a LOT of money sloshing around Europe right now. Some of the uncoordinated moves there have led to currency moves on pretty large scales (e.g. German and Irish banks saw a large influx immediately after they agreed to guarantee all deposits without limits).

Finland also just announced it's seeking a large loan from the Russians purely for the sake of propping up its currency reserves, not for passing on to banks (or so they say). It wasn't clear to me what currency this loan would be in.

[r-ness.livejournal.com]

T Bills broke the buck a while back - I wasn't aware they'd bounced back since.

Perhaps you mean money market funds breaking the buck? They often invest in T-bills.

It wasn't clear to me what currency this loan would be in.

Unclear, but my guess would be €.

[drwex]

I know that some MM funds broke here and there, but in specific I knew T bills had gone below a buck a while back. I wasn't aware they'd bounced back above $1.

[r-ness.livejournal.com]

I'm not sure what it is you mean by T-bills, then, or what you mean by "gone below a buck". Can I ask you to clarify? We might well be talking about very different things.

[drwex]

Below a buck meaning that if I 'invest' a dollar in the bills I get less than a dollar back.

[r-ness.livejournal.com]

I think I know what you mean, then, but it's actually a reflection of prices and yields on fixed-income instruments moving in opposite directions.

The price of three month T-bills got so high in trading a few days back that the return was less than what you put in. I.e., they got so expensive that functionally what was happening was that you paid the Treasury money, and they promised to give *most* of it back to you, minus a charge for hanging onto it and being such a safe place to keep it. Sort of like a safe-deposit box, except safer.

That's not breaking the buck so much as bidding the instruments so high their return became negative.

Enough people realized this was insane--and likely a result of panic buying--that they traded down a bit over the last few days, and now the things actually pay a very small amount of interest again.

[cerebralpaladin.livejournal.com]

For a very brief time, the short duration (30 days, maybe?) T-Bills had a negative interest rate last week-- i.e. if you gave the Treasury a dollar, they promised to give you back only slightly less than a dollar. The explanation that I heard was that T-bills are used for various financial transaction purposes (collateral, balance sheet requirements for banks, etc.), so that when the people who actually want T-bills as investments/places to park money bid the interest rate to essentially 0, the people who needed T-bills because they needed them for other transactions bid it to ever so slightly negative. I also believe that it was an intraday thing that lasted only a couple of hours. T-bills have gone back to trading at a positive interest rate, but for the short term bills it is a very, very low rate.

[r-ness.livejournal.com]

Coke. :)

[r-ness.livejournal.com]

I think it was the 3-month bill, and yes, it was intraday on a couple of days.

Krugman posted about it in his blog, and got a chart wrong in haste, but a glance at the Bloomberg site showed the same thing.

[r-ness.livejournal.com]

Also, do you mean Iceland?

http://www.reuters.com/article/americasDealsNews/idUSTRE4967M820081007 says, in part: "Prime Minister Geir Haarde said Icelandic officials would travel to Moscow on Tuesday or Wednesday to discuss terms for the loan to bolster the country's foreign reserves."

The number being talked about is 4 billion, and in euros.

[drwex]

Oh, interesting. You might be right. I was listening on NPR in a traffic jam and might have mis-heard.