What's Going On With The 4-Week Treasury Bill This Week?

lou | May 17, 2023 | 1,004 posts since 2010

So I am thinking about purchasing the 4-week bill at auction on Thursday, May 18. At Fidelity, they have listed it with an expected yield of 5.2%. This is based on what comparable treasury bills with similar maturities are selling on the secondary market at Fidelity. However, today the 4-week treasury bill closed at 5.58% as quoted on the treasury website and at 5.52 as cited in the WSJ. I need to make a decision before the Thursday deadline but I am having trouble figuring this out.

Last week the 4-week bill was auctioned at a yield over 5.7%. Did it also have an expected yield at Fidelity far lower than this? I know these distortions are because of the debt ceiling deadline in early June but why would there be such a great discrepancy between the treasuries selling on the secondary market and the yields we are currently seeing in the marketplace.

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Answers

sams1985 | May 17, 2023 | 781 posts since 2022

Yes, when I bought the 4 week treasury bill last week fidelity’s expected yield of 5.18% was way off. I think this week’s auction may top last week as the 4 week rate has risen a bit since last Monday.

lou | May 17, 2023 | 1,004 posts since 2010

Thanks, Sam. I have never seen anything quite like this before. The yield at auction is 50 basis points higher than the corresponding treasury on the secondary market. It's crazy.

DMC | May 17, 2023 | 46 posts since 2023

Maybe I'm just being overly cautious but even though I've been buying 4 week T-bills since last summer, I've hit the pause button until the government clearly gets through this latest debt ceiling mess. Whether or not it's all just political theater, and you'll eventually get paid back, there's a reason yields are so out of whack: T-bills maturing next month now face heightened risk, and taking on more risk is the exact opposite of why I would normally buy T-bills.

sams1985 | May 17, 2023 | 781 posts since 2022

True, i guess it's not really a matter of if you'll get your money back but when..esp if you tie up a lot of funds.

MAKNYC | May 17, 2023 | 323 posts since 2015

Barring a policymaker of consequence making any new, reputable comments I’ll predict this 28 day bill auctions in the 5.4% range. Yellen keeps citing June 1 to keep pressure on congress. The real problem date is probably closer to June 6. The bill being auctioned will mature on June 20, so completely unaffected by any realistic notion of a temporary timing default.

If 5.4% tickles your fancy then go ahead.

lou | May 17, 2023 | 1,004 posts since 2010

Interesting, although the 4-week treasury last week just before the auction was trading around 5.45% in the marketplace. The yield from that auction exceeded 5.7%, even though the yields in the marketplace never got above 5.5%. You don't think this will happen again?

MAKNYC | May 17, 2023 | 323 posts since 2015

I don't recall what the existing bill was trading for prior to last weeks auction (and by existing I mean a comparable June 13 maturity...not the prior week's auctioned bill which matures on June 6), so I can't really comment on that. Whatever it was, it was good enough for me to participate in last week's auction.

In a general sense, new issue paper will always auction at a slight premium to comparable existing paper. So what you should be looking at is existing paper maturing on/around June 20 which is the maturity date of this weeks to-be auctioned bill. There is a big kink in the treasury curve which hits its high on June 6 for the reasons I mentioned previously.. The premiums that are appearing on this short term paper are solely caused by this debt limit issue, not Fed policy, so there is limited rationale to compare a maturing bill of June 6. 13 and now 20 to one another to predict the outcome. Caveat.....unless new information concerning the debt limit issue is released between now and Thursday. Your best case scenario is that Yellen comes out before auction cutoff time and says she has sharpened her pencil and the new 'run out of money date' is closer to June 20....then you will get a big spike up in this weeks auction yield, and the previously auctioned bills of the last two weeks will rally in price dropping their yields.

p.s. Upon closer inspection of the yield curve, I will refine my current auction prediction to closer to 5.5% as of this writing, but admittedly a lot may change between now and Thursday morning. (Reason for the change...my original assessment was inadvertently based on ask prices. The better input would have been bid prices which are lower/yields higher)

DMC | May 17, 2023 | 46 posts since 2023

Can someone please give me their best/clearest rationale for why it would be good to buy T-bills maturing on or around the so-called x date? Is it as simple as "because there's no way the government outright defaults on the payment so at most it will be a short delay and you can take advantage of a major spike in yields?"

But is it really worth it? It's such a short term bill anyway, it's not like you're getting a 50+ BPS premium for a whole year. So it's not a lot of upside in exchange for a potentially big downside headache (I don't think there will be a total default either but with the people running the government these days, a black swan event seems more and more likely every day).

And, by the way, if there is a delay in payment and say it's relatively benign around 1 week, how would that affect these yields? Presumably you'd get 0% for that delayed week, so does that mean you'd effectively end up with something like a 5-week T-bill at 4%+? If that's so, I'd just as well park my money in a HYSA or MM at or around 5% until the dust settles.

MAKNYC | May 17, 2023 | 323 posts since 2015

DMC And you think that 5% HYSA/MM would be money good in a U.S. Government default? Who holds all those outstanding treasury securities affected by such a default? (hint....its not just China) Government backed mortgages/MBS? Agency paper? The FDIC would be toast without it's government backstop. No or delayed government payments/entitlements.....credit card bills, auto and mortgage payments stop flowing in. Its a domino effect.

So unless you have taken your funds out of circulation by investing in bitcoin or gold (and that's not a recommendation), I think it is naive to be scared of what you apparently are, yet be willing to invest in a lower ranking derivative of the defaulting entity (i.e. the banking system).

DMC | May 17, 2023 | 46 posts since 2023

Thanks, MAKNYC. I don't think anything would be safe in a true default scenario. But if there is some kind of technical default where there is a brief delay in repaying bondholders, I could see FDIC holding up while bondholders wait to get paid.

Lou, maybe you're right about making up the yield, though I don't see how that would work since you purchase T-bills at auction at a discount and your yield to maturity is therefore set at the time of purchase assuming a 28-day holding period. If it instead takes 35 days to get repaid, is the government just going to give you back even more than the face value at the bond to make up the difference? Seems unlikely.

lou | May 17, 2023 | 1,004 posts since 2010

Yes, they would have to. The alternative is a default which they can't do under any circumstances.

DMC | May 17, 2023 | 46 posts since 2023

Who knows. Uncharted territory I guess. But if they pay you back late it's a technical default either way because of the delay in repayment. As for the amount of repayment, they are only promising to pay you the face value of the bond at maturity not the investment yield you see at the conclusion of the auction. That probably means, while still a technical default, they can and would just pay you back that same face value (and not more than face value), even if it takes an extra week or so. And that means you ultimately wouldn't get the yield to maturity that you were expecting even though you'd get the principal and absolute dollar amount of the interest you are expecting.

MAKNYC | May 17, 2023 | 323 posts since 2015

DMC The most likely scenario under your set of concerns would be for treasury to prioritize payments. Keep in mind, even on the X date, there are still funds coming in and funds going out. Just not enough to fully balance out. So the government would delay payments where it is most practicable and they could get away with it most seamlessly. Commercial contracts, delaying tax refunds, and employee compensation come to mind. Treasuries would likely be the last to see any delays trickle down to them.

DMC | May 17, 2023 | 46 posts since 2023

Thanks, Mak, understood. But as a general (even if bordering on theoretical) matter, do you agree that if (in the unlikely event) payments on T-bills were in fact delayed, you might very well not be obtaining the yield to maturity (or investment yield) originally expected after auction?

MAKNYC | May 17, 2023 | 323 posts since 2015

Delaying payments on treasury debt would open a somewhat unmanageable process. The government and their systems are not equipped to handle such one off calculations, and to my knowledge there is no codified method of handling/calculating such overpayments, hence I see this as an absolute last resort prior to actually administering haircuts on repayments.

I stated my theory in an earlier thread on what might happen under this scenario. The easiest solution is for the Fed to place standing orders to buy every matured bill, bond and note on maturity date at full value. QE2023. They would easily rationalize this. And it gives every holder the right to pass the cost of continued carry onto the Fed’s balance sheet. The Fed would break even when the debt issue is resolved and since they create the funds electronically it would cost them nothing. But it would take some time to implement initially and the unintended consequences would be huge….congress would never again have to resolve their debt disputes.

lou | May 17, 2023 | 1,004 posts since 2010

I agree with MAKNYC. If there is a default on treasuries, than all money market funds are in serious trouble. I would also think if you have to wait beyond the maturity date for your money, they are going to pay interest at the same yield you were already receiving before the maturity date. Otherwise, it would be considered a default, which they cannot do under any circumstances.

w00d00w | May 17, 2023 | 360 posts since 2012

i'd recommend ignoring Fidelity's estimate. as someone else pointed out the last time this topic came up, a reasonable estimate seems to be the highest bid offer in the secondary market for the June 20 maturing T-bill, just prior to the auction. whether the auction goes off higher or lower than that number depends on the collective "wisdom" of the competitive bidders.

lou | May 18, 2023 | 1,004 posts since 2010

In case anyone cares, I did end up purchasing the 4-week bill at the auction today. The final yield was 5.482%, about 25 bps than last week. Biden unfortunately blabbered something about being optimistic that they could finalize a deal for the debt ceiling in the near future, causing the yield to drop. For some reason the markets believed him. Anyway, I am happy with a state tax-free 5.5% for 28 days.

sams1985 | May 18, 2023 | 781 posts since 2022

Still a great rate...equivalent to a 6.35% CD if you live in a state like NY or CA.

Confused1 | May 17, 2023 | 87 posts since 2018

Last weeks auctions
This week’s T-bill auction results:
Bills CMB CUSIP Issue Date High Rate Invest Rate Price per $100
4-Week No 912797FN2 05/16/2023 5.605% 5.723% $99.564056

lou | May 17, 2023 | 1,004 posts since 2010

You didn't address any of my questions. All you did is post the results of last week's auction.

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