Search for Higher Quality Collateral

On today’s show we are going to focus on the market for T-Bills to try and understand why there is an apparent shortage of this paper. Demand is exceeding supply. Why is that? It doesn’t make sense. Is the market saying that they want to US government to spend even more? Do they want to see even greater deficit spending?

The government holds a monthly auction for T-Bills and these notes sell in the open market to the highest bidder.

The highest yield paid in the Jan 5 auction was 4.1%.

The current RRP set by the Federal Reserve, which is supposed to be the floor set by the Fed at their last meeting, is 4.3%. But none of these T-bills sold at 4.3%. They all sold at a lower interest rate. There were sales at 4%, and the lowest sales were at 3.85%. So why would these bonds selling at auction be getting less than the coupon interest rate? Why would the buyers be willing to pay extra for these bonds and accept a lower interest rate?

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Host: Victor Menasce

email: podcast@victorjm.com