Thursday, May 01, 2008

Return of the 52-week T-bill

I saw mention in the press of the return of the 1-year T-bill. I did some searching, but could not find a formal announcement of it, but I did see that the 52-week T-bill is on the Tentative Auction Schedule of U.S. Treasury Securities for the auction to be held on May 29, 2008. Unlike the 4-week, 13-week, and 26-week T-bills which are auctioned every week, the 52-week T-bill will be auctioned every four weeks (not exactly monthly).

I personally do not expect to be buying them. They make sense if you need to do a "bond ladder" or if you expect interest rates to decline sharply.

Besides the fact that the U.S. government is going deeper in debt, the restarting of 52-week T-bill auctions simply highlights the fact that despite the U.S. debt burden, there is extremely high demand for U.S. Treasury securities, which belies the suggestion that somehow the financial position of the U.S. is somehow "weak." The "full faith and credit" of the U.S. government is alive and kicking.

In theory, money market funds could hold 52-week T-bills, but there is some liquidation risk in that the value of the T-bill could decline on the secondary market which would cause a loss if the bill is sold prior to maturity. One year is a dog's age in today's credit markets. I suspect that there will be a very lively secondary market in "off-the-run" 52-week T-bills, for people who need to lock in a rate for less than a year but more than six months.

An open question is whether a new point will be added to the Treasury yield curve and if so, when that will occur.

-- Jack Krupansky

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