Two Tension Points To Watch In T-Bills

Tyler Durden's picture

Normally Treasury Bills are not something discussed around the dinner table or hotly debated on the business news channels. As UBS notes, the fact that the Tbill market has become the focus of attention is an ominous sign, and indicates that the stalemate over the debt ceiling could have profound effects. While TED-Spreads, and financial CDS were the key indicators in 2008, now we must watch money fund flows, and Tbill forwards. In a sense, the Tbill market is the proverbial canary in a coal mine for the US financial system. The canary is not yet back in good health.

Via UBS,

Tbill rates and volatility have surged

Normally Treasury Bills are not something discussed around the dinner table or hotly debated on the business news channels. The fact that the Tbill market has become the focus of attention is an ominous sign, and indicates that the stalemate over the debt ceiling could have profound effects.

Figure 1 drives home the point regarding the surging volatility of Tbill yields. October 24 is the first Tbill maturity that follows the Treasury Department’s self declared drop-dead date for the debt ceiling. Prior to the past few weeks, the yield typically moved in a 1-2bp daily range. In the last week, the trading range has widened enormously.

Money market and reserve manager sponsorship are key to the Tbill market

Tbill yields have surged because of political risk, not a potential shift in monetary policy. We are confident that Tbill holders have shunned the shortest maturity issues because they are concerned about timing and headline risk, not over worries about ultimately being paid. Tbill buyers are not paid nearly enough to take on issuer default risk. Consequently, some of them may choose to curtail their purchases or simply avoid the Tbill market until things calm. Figure 2 shows that money market funds focusing on US government securities have nearly $1 trillion under management. If this group retreats even marginally from the Tbill market then yields could jump, or remain high.

Foreign official institutions account for about $360 billion of Tbills (Figure 3). As we noted already, we expect this group of investors to be reasonably patient. They could back away from the Tbill market to some extent. However, we expect them to have much less influence on bill prices in the near term than the money funds.

The Tbill market has become a happier place on October 10. Yields have fallen considerably, and forwards beginning in late October and through November are much less negative than they were a day or two ago. Nonetheless, some forwards are still notably negative. This pattern tells us that bill investors are still quite nervous.

The bottom line: watch money fund flows, and Tbill forwards. In a sense, the Tbill market is the proverbial canary in a coal mine for the US financial system. The canary is not yet back in good health.

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Dead Canary's picture

WHAT?  Did someone say my name?  Do I smell gas?

Pure Evil's picture

Did some big yellow bird just croak?

max2205's picture

Monday is Columbus funds will clear the Fed till Tuesday....Enjoy!

Urban Redneck's picture

And that is they key distinction between the symptom and the disease, both of which are readily observable.

When a momo muppet gets a margin call it's no else's problem, when a fund manager gets a margin call- it can become everyone else's problem rather quickly.

Follow the cash, we already know who will be demanding MOAR...

Abi Normal's picture

Default the biotch, I say let the deadline pass, and let's see where the chips fall.  This is the opportunity of a lifetime to change the beast, don't you think?

TheRedScourge's picture

Nothing will change. They know if they default, interest rates go nuts and they won't be able to continually elevate the present level of insanity of it all so as to satisfy their constant hunger for more, and thus their game is over. Those sociopaths in Washington didn't weasel their way to the top for a lifetime only to let the game end once they've finally maanged to get to the top because a few of them can't agree on the particular way to screw the rest of us. If there's a collapse, it can only be from something they and their advisors never saw coming, which means most of us won't see it either, we will merely have known that it's been in the works for a while.

DoChenRollingBearing's picture

This has been an interesting weekend.  Monday will start an interesting week.  Treasuries matter.

fonzannoon's picture

Dochen, forget the 30yr, 10yr, the 5yr and the 2yr. Those canaries have been tranquilized. If the market has any chance of showing up, these short term bills are the ones that would blow sky high.....and i mean a hell of a lot higher than 40bps or whatever they are now.

NoDebt's picture

The move in the yield, large though it may be in percentage terms is not what matters.  It's the OTHER stuff tied to it.  Derivatives, CDSs and the like.  Imagine a CDS that has to pay if a short term treasury payment is late (I don't know if such an instrument exists, but use your imagination).  That would be a CDS backed by an insuring financial institution that had to make the payments on every contract they wrote, not the US Treasury + Fed.  That could push even a pretty big institution underwater pretty quick.  

That being said, I still have seriousl doubts it's going to go down like that.  Much like Europe, there will never be a declared "credit event" to trigger them.  The losses will remain more diffuse and therefore unlikely to start a 2008-style cascade.

"Wait here.  I'll be back with your money in 10 minutes.  If I'm not.... just wait longer"  Paraphrasing Ace Ventura.

andrewp111's picture

The CDS on US Treasuries total only $5 bil and are mostly in Euros. They are too small to even think about. It is the T-bills that are used for collateral in infinite rehypothecation schemes that could be a big problem.

kaiserhoff's picture

True, if there were rule of law.

I suspect TPTB will simply rewrite the rules in their own interest, as they have for the last five years.

disabledvet's picture

"whoever has the gold makes the rules." that's still the Treasury Department if I'm not mistaken.

LawsofPhysics's picture

LMFAO!  Sorry, the treasury has no gold.  Talk the the BRICs.

NoDebt's picture

Interesting point.  What would cause them NOT to be acceptable collateral any more?  I suspect we would get to a similar answer- some triggering event or declaration that would never be allowed to happen, even if payments were delayed.

Seer's picture

"What would cause them NOT to be acceptable collateral any more?"

I'm seeing a pretty darn good manuevering going on which essentially smacks all other players, leaving USTs as the best looking horse at the glue factory.  Sadly, we're going to ride this dead horse to the bitter end...

DoChenRollingBearing's picture

I'll try to drop you guys a line from Peru on Wednesday.  Before I go, remind me to take another $500 from the ATM tomorrow and a few more thousand on Monday.

Jim Sinclair has been saying "GOTS" (get out of the system).  One day he may be right.  That will be a long and interesting day...



Monday is a holiday, the banks are closed.  Hmm...

bertone's picture


I am ignorant of something that I should be aware of.


I have seen you're accurate calls on bonds.

If you have the time, help me out here.

Thanks in advance.

lolmao500's picture

I'm a bondzilla atheist. Bondzilla is a myth.

I am Jobe's picture

FEDS are cornered. Fucked 

Bud Conrad: The Bursting of the Bond Bubble Is Now Upon Us

virgilcaine's picture

.25 BP for ToiletPaper.. where do I line up to get some? src.

lolmao500's picture

Well if the goddamn medias and politicians didn't lie their asses off and said this would be a default, then none of the markets going nuts would have happened.

lolmao500's picture

The Tbill market has become a happier place on October 10. Yields have fallen considerably, and forwards beginning in late October and through November are much less negative than they were a day or two ago.

But don't worry, if no deal by tuesday, yields will break new records.

Figure 2 shows that money market funds focusing on US government securities have nearly $1 trillion under management.

$1 trillion?? Fucking lightweights. Bernanke got more than that in his left pocket.

kaiserhoff's picture

There are still money market funds?  How and why?

OK, I understand that at some mega level there are shekels to be made, but seriously, wouldn't the moves be a lot more dramatic if there were a safe harbor somewhere, anywhere, to stash the cash?  We can go to gold, silver, and ammo, but the big boyz have few options.

Seer's picture

"the big boyz have few options."


When you're a player you gotta play the game.  When you've been making money lying about everything you can't change...

ebworthen's picture

When is the 10 year T-Bill going to get back up to 3%?

I'm impatient for 4.5%, but I'll settle for a realistic 3% now, considering.

kaiserhoff's picture


Right after Snooki regains her virginity.

wisehiney's picture

You remember....Year or less is a bill, longer than year to ten is a note,  ten or longer is a bond. 

Round and round and round she goes, where she stops, fork if i know!

Urban Redneck's picture

Never, since they don't exist. As to 10y notes- the FED has cornered the market (and the banks and primary dealers will step in if any of the relatively small float starts misbehaving), so only the FED can answer when they will PERMIT the 10yr rise to that level, which would be contingent upon anticipated interest rate derivative impact. Since the chattering class and even CNBS/Bloomturd say BAD things will happen at 3%... I wouldn't hold my breath.

ebworthen's picture

Thank you Gents, I stand corrected.

10 year T-Bond, not Bill.

C'mon 5%!!!

q99x2's picture

Yellen sat on the canary.

blindman's picture
The Nightmare Scenario
A Repo Implosion
.."… if the ugly day of a default comes, lenders may simply stop accepting U.S. debt as collateral. That will have the effect of sucking some $600 billion in liquidity out of the banking system. Unable to get funding for Treasurys, securities dealers would be pressured to sell them-or other assets-to find new funding, creating a fire sale dynamic…..

And, of course, this scenario is only about how the Treasurys work in the repo markets. U.S. debt is used as collateral for derivatives swaps and numerous other transactions; if they are suddenly worth less than expected, lenders can be expected to demand more collateral up front, putting even more pressure on the financial system. That’s why pressure is building to raise the ceiling before the world’s largest economy enters a scenario with so much uncertainty.”

Repeat: “That’s why pressure is building to raise the ceiling before the world’s largest economy enters a scenario with so much uncertainty”." m.w.

olto's picture

I don't know what to say about all of the hysteria on this site, so I will just ask a silly question of one and all:

If US debt is not to be considered collateral----then what is?

US stawks, US corporate debt, US real estate, Comex commodity contracts----?

If UST-bills are not good collateral in the US-----consider what that means for everything else in the US-----


alphamentalist's picture

i think there is a very limited chance of a default (really only if obama orders the treasury to de-prioritize UST payments in order to create a new wave of chaos to advance his dreams with). however, there seems an excellent chance that we go past the x-date without a spending resolution. in that case there will be USG downgrades. the irony will be that people willl rush to buy even more UTSs (like every other crisis). one, to settle calls for more collateral, which will prompt a broad-asset deleveraging, and, two, because once they sell all else they will have to buy something. prospect for USTs has probably never been better. but as you say, for everything else in the US....

Seer's picture

Of course there's little chance of a default.  This was solidified during the GW Bush administration in which the POTUS can now pretty much define anything as a national emergency.

The US dollar will be printed and printed until it cannot be jammed down any more throats, and at this time the US govt will declare any payments as void because the payees refused payment.

I think that the notion of big sell-offs is a bit muted by the fact that one really has to have something else to move in to.  Making big shifts, while seeming a good way to get out of one boiling pot of water, is quite likely to result in climbing in yet abother pot of boiling water...  I'm just not seeing any big players willing to be responsible for the last straw on the camel's back.  The "fortunate" thing with the Fed buying up most of the slop is that they don't have their own army to send in for seeking repayment...

RebelDevil's picture

Hence why PM's are manipulated!
If the gold price trajectory was left in tact, then there would have been a big shift from treasuries to gold at a certian threshold.

blindman's picture

and turn it around and ask if us debt is collateral
---then what isn't?
Bob Dylan's 115th Dream
'Now, I didn't mean to be nosy
But I went into a bank
To get some bail for Arab
And all the boys back in the tank
They asked me for some collateral
And I pulled down my pants
They threw me in the alley
When up comes this girl from France
Who invited me to her house
I went, but she had a friend
Who knocked me out
And robbed my boots
And I was on the street again.' b.d.

olto's picture


What sophistry is this, you write?

It is every citizen's debt, but it is a credit to the payee.

And, if a UST-bill is not redeemed as promised then,

"you can kiss yo ass g'bye, muther fucker!".  (Sun Ra----Nuclear War)

I want to stay in this boring dream until something really happens---

and if UST-bills are not redeeemed as promised, I don't want to come out of it until the dust settles.

Oh, yeah---who is Bob Dylan----son of Dylan Thomas?

Thanks, as always


blindman's picture

i think sophistry is the right word but
not just sophistry, a tapestry of sophistry
and with music!
it is an interesting question this, what is the limit
to the size of the rolling over of debt as a
collateral mechanism for further debt money creation
in a human being based economy.
maybe the answer is political and social as in how
much financial pressure and financialization of the
elements of life can the human mind tolerate before
going collectively insane?
zimmy has a way with verse. he is like the boring
dream, if you listen and think about it it seems like
something is really happening but maybe
not? maybe nothing ever really happens but if that
is true then this entire bond market thing is going
to run into the brick wall of self destruction from
a natural limit on its capacity and possibility to
grow any further to support its own under carriage - weight.
more free sophistry! no music this time.
ps. i couldn't resist the collateral line,
it is the child in me.

olto's picture


You are a fun guy---the child in us is all that matters----the reason I couldn't resist 'sophistry'.

All of this is truly too heavy for this human mind---and after it does whatever it does, all one has is more or less or the same amount of money, gold, or some other worthless object higher or lower or at the same price

but, I have nothing better to do as I wait in this boistrous bistro of a city in-----where am I---oh, yeah--south america

I have tried to play with humans on three continents this year and haven't found any players

everyone is so serious these days---as though any of this matters

Well. I won't go on------thanks for playing tonight---it was fun and light---just what I needed


2bit Hoarder's picture

I don't believe he is insinuating that the T-bills would no longer be accepted as collateral, but if yields go up dramatically, the cash value of those bills would not be sufficient collateral for outlays ... which would create a need for additional collateral, which would pull liquidity.  I don't see that as hysteria, but a fairly logical scenario.

if my home were to lose 3% of it's current value, it may not be enough collateral for a recurring business loan ... may have to throw my car in the pot as well just to get the same recurring loan.  if my home lost 10% ... no loan for me

unemployed's picture

The press already reported Dimon,  Fidelity etc etc  had already zeroed their T-bill positions for those coming due over the next few weeks.

I can only say bring the default on.   Democrats - hold firm  do not negotiate,   Republicans,  hold firm do not negotiate.    That should do it.

Seer's picture

Lots of tea leaves here to read:

Global finance chiefs ready defenses ahead of Fed exit

Batten down the hatches and watch out for the undertow!

olto's picture


There is a lot of talk out there---everyone has an opinion.

Can you really imagine that the UST-bills will not be redeemed?

I can't----a digital credit that will be rolled over on a computer even if Treasury has to lie about this item the way it lies about everything else.

Maybe, these dudes are psycho enough to pack a pistol with five cylinders and put it up to their heads and pull the trigger, but I don't think so----not yet.

And a half a per cent discount on less than a years obligation is nothing to sink a ship over---fifty bucks on ten grand, as I recall.

As far as all of the big guys moving out----why not roll-over when there is so much hysteria or slip into longer dates of other T's now that SRa. Yellen is front and center?

Your link was interesting, but just hysteria on a different level----

Not redeeming UST-bills as promised is a non-starter.


Seer's picture

olto, the article, as I read it, is projecting exactly what is going to unfold.  This is a warning to the "developing" countries to prepare for large capital outflows.  The Big Dogs are calling it back as a way of making it more desireable* (for those not within their own dog houses).  This starts(?) with the Fed's action of tapering.  And as I've suggested, I believe that most risk is being transfered into entities that belong to sovereign countries or are key/top agents of same (such as the Fed).

* People are starting to tire of the USD and Euro- there's stirings to break away from these for global trade.  So, there has to be a big shock to those that might be considering such a move.  It also draws the suspense out longer, time that will, I'm figuring, allow for China's sheen to start fading (if China starts to teeter I would think that that would negatively impact Russia's position- the war has always been about Eurasia, US vs. Russia).

Throwing change-ups often does a pretty good job of keeping everyone off-base.  And we've been seeing nothing but fastballs for so long that they pretty much have to change their pitches...

olto's picture

Hi Seer,

I understand that, but in looking at the charts and seeing that some big players are repositioning, in a real market/world would indicate to me that failure is imminent. The problem is that they are using UST-bills as an illustration and thoughfailure may come---it won't be the bills. I have a hard time, therefore, taking the article seriously.

But you touch upon a couple of other things that are SERIOUS:

developing economies and baseball

I am in one the developing countries in south america and you know what?

We can't spend the money these boomers/yuppies bring down here fast enough to make a dent in their capital flow. 

It is a shame, but we are 'developing' in exactly the same way as the now-failed models----some think it is 'our turn', but I think it is just a travesty of the old, failed machine.

the most interesting thing would, of course, be to see the UST-bills fail just to shake things up a little and blow some fresh air into this shithole-----that would be interesting, indeed!

Of course you would need a really great sense of humor to enjoy seeing

such sight, but if a change-up is what you want here, that will be one hell-of-a-change-up------unfortunately, there is no Yogi Berra to call for that pitch among the brain dead zombies or as they like to be referred to: TPTB.

    redmption failure on UST-bills will be the all time greatest change-up ever thrown

thanks Seer for lightening the evening a bit

Brett Merkey's picture



"thanks Seer for lightening the evening a bit"

And thanks, Olto, for adding gravitas to my morning reading. If you see this and care to respond, could you elaborate on: "We can't spend the money these boomers/yuppies bring down here fast enough to make a dent in their capital flow."

I am ignorant in the arts and mechanics of capitalism in the trenches--which is why I'm here in ZH, picking up whatever sparkly stuff I find...




blindman's picture

12 OCTOBER 2013
Moyers: Wendell Berry On Peaceful Resistance To the Savaging of Life By Reckless Greed

I finally had the time and opportunity to see this interview, and enjoyed it more than I thought I might." ,,,, jca

The Peace of Wild Things

When despair for the world grows in me
and I wake in the night at the least sound
in fear of what my life and my children's lives may be,
I go and lie down where the wood drake
rests in his beauty on the water, and the great heron feeds.
I come into the peace of wild things
who do not tax their lives with forethought
of grief. I come into the presence of still water.
And I feel above me the day-blind stars
waiting with their light. For a time
I rest in the grace of the world, and am free.