T-Bills 1m-3m Spread

yogibearbull

T-Bills 1m-3m spreads are as crazy as they can be.
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202304

4/17 112 (Auction Day for 3m, past)
4/18 131
4/19 121
4/20 172
4/21 178
4/24 166 (Auction Day for 3m, past)
5/1 ? (Auction Day for 3m, next)

The fear of debt-ceiling chaos (in June/ July?) has gripped the institutional world:

1. Institutions are reducing their mark-to market exposure by BUYING 1m and SELLING 3m. That is what is causing super-wide 1m-3m spreads.

2. Strangely, several m-mkt funds have reduced their average maturities. While they don't short, they have become price-insensitive buyers of 1m - better of protect mark-to-market NAV than to go for slightly higher 7-day SEC yield.

Just a few weeks ago, my PLAN was to start relying on ultra-short bond funds (FCNVX, ICSH, etc) instead of T-Bill rolls. But because of this 1m-3m craziness, I am doing just the opposite now. For the Auction yesterday, I SOLD some ultra-ST bond funds to BUY 3m T-Bills, and may do so also next week, and the week after - until this 1m-3m spread dissipates. The 3m T-Bills are just too attractive now to pass up. Mark-to-market issue isn't of concern to me (or to most retail investors) and I am betting that the DC cannot really be that stupid to let things slide.

AndyJ

There's a 17 week auction tomorrow, and the annualized yield today is about the same as the 3m with a slightly longer maturity, taking it out to August 29. I'm going that way, on the wild guess that even if the fit hits the shan in June/July, the chaos will be over by then. Assuming of course that the adults would decide to unite and end the chaos ...

Sven

Does it imply that the money market yield can drop soon because the one month T bill?

For now I will let cash build up as we approach the deadline of debt limit voting. I have no confidence on McCarthy and there is a chance of repeat of 2011.

yogibearbull

The fed fund (overnight) rate is 4.75-5.00% (likely to change on 5/3/23). So, these rates should be viewed in that context.

The 1m T-Bill yield fell to 3.36% on 4/21/23, but yesterday (EOD, 4/27/23) it was 4.27%, low compared to the fed funds but not alarmingly so. Yesterday, the 3m T-Bill yield was 5.18%, so the 1m-3m T-Bill spread was 91 bps (vs 178 bps on 4/21/23).

Unclear how anything has changed for debt-ceiling - there is a House proposal that would be just DOA in the Senate.

Anyway, the 3m T-Bill still looks attractive for Monday 5/1/23 Auction. Orders can be entered at brokerages until early-AM Monday, 5/1/23. The settlement is on Thursday, 5/4/23; money would be reserved/blocked by the brokerage on Monday, but could also be covered by another security settling on 5/4/23. Fido would generate margin alert(s) but those can be ignored if there are matching settlements on 5/4/23; Schwab and Vanguard would just indicate pending activity on their balance screens but won't/shouldn't send any margin alerts.

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202304

Derf

@yogibearbull ; Thanks for the info, "
Anyway, the 3m T-Bill still looks attractive for Monday 5/1/23 Auction. Orders can be entered at brokerages until early-AM Monday, 5/1/23. The settlement is on Thursday, 5/4/23; money would be reserved/blocked by the brokerage on Monday, but could also be covered by another security settling on 5/4/23. Fido would generate margin alert(s) but those can be ignored if there are matching settlements on 5/4/23; Schwab and Vanguard would just indicate pending activity on their balance screens but won't/shouldn't send any margin alerts."

msf

Often, though not always, one can do a little better on the secondary market. Currently, the 3 month T-bill expected auction rate shows as 5.012%, while I'm seeing (at Fidelity) a T-bill maturing 7/27/23 with an ask yield of 5.124% (quantity 1).

You have to go digging through the book (multiple offerings of a given security) to find offerings that don't require you to buy $100K or so. If you make do the effort, you may be able to eek out another 10 basis points or so (annualized). Might not be worth your time just to make an extra 25¢ on a $1,000 T-bill over three months. Depends on how much you're investing and how long until maturity.

yogibearbull

A strange thing happened today for T-Bills. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202304

The 1m-2m spread of 79 bps is HIGHER than the 1m-3m spread of 75 bps. Peak T-Bill rate now is for 2m.

Of course, it was in the news that Janet Yellen moved the debt-ceiling drop-dead date to possibly June 1 - just a month away. https://www.cnbc.com/2023/05/01/treasury-debt-limit-measures-may-run-out-by-june-1-yellen-says-in-letter-to-mccarthy.html

yogibearbull

Stranger!

What does T-Bill 1m-3m inversion today of -50 bps mean?
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202305

If the high 1m-3m spread was from the debt-ceiling fiasco, is there progress on its resolution now? Or, just the Treasury traders going bonkers?

FRED hasn't updated for 5/4/23, but this is T-Bill 4w-3m spread chart (live) and it should update tomorrow,
https://fred.stlouisfed.org/graph/?g=139k2

Sven

Indeed, one month T bill spiked to 5.76% on 5/4/23; higher than all other T bills. Not sure what to make of it.

Not sure if I want to buy T bills, CD, or just sit this out past June 1st.

yogibearbull

I think that I got it. The 1m T-Bill yield has spiked because the market now thinks that 1m maturity will be AFTER the drop-dead date for debt-ceiling. And this expectation changed THIS week.
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202305

Sven

Thanks @yogibearull for your input. So the market is expecting the worst scenario of US treasury will default by June 1st? It came close in 2011, but the psychological impact was unfortunately not long lasting enough.