US T-Bills Giving Zero Return

On 9^th December 2008 the US Government sold $30 billion in four-week Treasury bills at zero percent. In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager to park money in the world’s safest investment, United States Government debt, that they agreed to accept a zero percent rate of return. Investors shaken by the losses in the markets are pouring cash into government bonds from every corner of the globe.

Why is this significant? I will get to that but first some key facts:

• A T-Bill or a Treasury Bill is a short-term debt obligation backed by the U.S. government with a maturity of less than one year.

• T-bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year)

• Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. US Government Treasury bills are regarded as the least risky investment in the world.

The formula for the calculation of the yield on T-Bills is:

Significance Of T-Bill Yields

In itself the zero percent interest rate is no reason to panic. This is good news for American taxpayers in general. Low interest rates on government debt allows the United States to finance its $700 billion bailout of the financial system very cheaply. But it also underlines stubborn anxiety in the financial markets that could keep world economies sluggish for years to come. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.

High demand for government debt rather than corporate debt could stifle economic growth. Even though Central Banks all over the world have reduced interest rates, borrowing costs for companies remain stubbornly high. Corporate bond rates have been surging to record levels which makes it more expensive for companies to raise money. And when companies can't raise money, they often have to cut costs, sometimes through layoffs.

The worry is that the government will become the most attractive lender and borrower in the market — crowding out others in the private sector.

PS: Daily Treasury Yield Rates are available at the following website:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml