The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors – an effort known as “window dressing” on Wall Street, analysts said.
Ok, so on the surface, it may not be so bad. Typical end of year stuff, and since Goldman and Morgan Stanley moved their year-ends to coincide with banks like Citi, Bank of America, et. al. there may be more window dressing happening at once. It’s certainly possible, and I don’t think anyone can dismiss it.
But at Calculated Risk, I get the feeling he has a little different take. After looking at all the same links I did (except his), his take?
No worries …
I get the strange feeling he was being sarcastic…
Meanwhile, Bloomberg had this to say on the subject:
Treasury three-month bill rates turned negative yesterday for the first time since last year’s credit freeze, on concern prices of everything from stocks to commodities are too high given the outlook for economic growth.
T-bills maturing in January had negative yields. So investors were paying for the privilege of owning those bills, without any regard to interest. Three-month “on the run” T-bills mature in February, so these were “off the run” bills getting a bid. Typically, off the run T-bills or Treasury bonds give you a higher yield than on the run because the newer on the run debt is more liquid – you can turn it into cash quicker. So an off the run bill catching this kind of bid is a bit abnormal to me. But if you were looking for data points to corroborate or refute the idea that this is a problem, there are two data points that might be useful to look at: TED spread and Fed funds.
TED spread is simply defined as the spread between three-month dollar LIBOR and three-month T-bills. I haven’t used this indicator in over a year because after the Fed moved away from a Fed funds target rate to establishing a target range for Fed funds and with all of the liquidity being thrown at the market, I thought the spread compression was fake and indicated the market for interbank money was broken. I discuss some of this here:
Then I looked at a chart of TED from today:
I’m not a technician, but try and follow along. The blue bar on the left represented overhead resistance while the red and green lines represented support, forming a downward channel the spread was trading. Since this is a spread measure, it shows the spreads on risky (LIBOR) between riskless (T-bills) was tightening – you got paid less to take risk. During the summer you can see the channel got tighter and by September, a slowly rising channel developed, so spreads started widening again. The question is whether or not that little bump at the end of the chart ends up moving past overhead resistance – a sign of spread widening.
The other data point I also want to watch is Fed funds. I’d keep tabs on where that trade was settling on a daily basis and more importantly, the high, low, and standard deviation. You can get all of that from the New York Fed here. It’s been trading around 12 bps for the past month and looks stable at this point, but if banks start to have a problem maintaining required cash reserves, it will show here. Trading will get more volatile.
What do I think caused the rate action we saw yesterday? I’d say it was window-dressing, but I don’t think it’s the normal garden variety window dressing. No, I suspect there will be a lot of charge-offs for the quarter so this is a flight to quality bid.