Why are 1 month t-bill rates low?

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Revision17
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Why are 1 month t-bill rates low?

Post by Revision17 » Wed Jun 19, 2019 6:55 pm

Today the fed decided to keep rates at 2.25% to 2.5%. Looking at the treasury yield curve site, the yield for the 1 month has fallen from 2.36% at the beginning of the month to 2.18% yesterday. I expected this was because investors anticipated the fed would cut rates. However they decided not to do so.

Now that it's known as of 2PM today that the Federal Funds Rate will stay at 2.25% to 2.5% likely for over a month, why are people willing to lock money up for a month at 2.14% today? :confused

I thought that as soon as the news hit, the one month would jump back up to at least 2.25%?

JBTX
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Re: Why are 1 month t-bill rates low?

Post by JBTX » Wed Jun 19, 2019 7:07 pm

Those are yield curve rates, not short term interest rates (I think) Yield curve is the difference of long term rates vs short term rates. Long term rates have dropped materially in the last month.

https://www.cnbc.com/quotes/?symbol=US10Y

Grt2bOutdoors
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Re: Why are 1 month t-bill rates low?

Post by Grt2bOutdoors » Wed Jun 19, 2019 7:09 pm

Revision17 wrote:
Wed Jun 19, 2019 6:55 pm
Today the fed decided to keep rates at 2.25% to 2.5%. Looking at the treasury yield curve site, the yield for the 1 month has fallen from 2.36% at the beginning of the month to 2.18% yesterday. I expected this was because investors anticipated the fed would cut rates. However they decided not to do so.

Now that it's known as of 2PM today that the Federal Funds Rate will stay at 2.25% to 2.5% likely for over a month, why are people willing to lock money up for a month at 2.14% today? :confused

I thought that as soon as the news hit, the one month would jump back up to at least 2.25%?
They don’t believe the Fed, inertia, and they don’t see compelling values in other asset classes.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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whodidntante
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Re: Why are 1 month t-bill rates low?

Post by whodidntante » Wed Jun 19, 2019 7:15 pm

People are happy to lock up at money at that rate. If they weren't, the rates would be higher. That's how the bond market works.

columbia
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Re: Why are 1 month t-bill rates low?

Post by columbia » Wed Jun 19, 2019 7:33 pm

whodidntante wrote:
Wed Jun 19, 2019 7:15 pm
People are happy to lock up at money at that rate. If they weren't, the rates would be higher. That's how the bond market works.
And more broadly: they have low expectations of the risk premium offered by stocks.

I know that’s true of me, but I’m possibly overlaying my...bias.

RAchip
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Re: Why are 1 month t-bill rates low?

Post by RAchip » Wed Jun 19, 2019 9:43 pm

I would not characterize buying a one month t-bill as “locking money up.” Its only 30 days and its highly liquid so it can be sold prior to maturity if necessary. The interest rate is what it is because he demand is high.

venkman
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Re: Why are 1 month t-bill rates low?

Post by venkman » Wed Jun 19, 2019 10:54 pm

Revision17 wrote:
Wed Jun 19, 2019 6:55 pm
Now that it's known as of 2PM today that the Federal Funds Rate will stay at 2.25% to 2.5% likely for over a month, why are people willing to lock money up for a month at 2.14% today? :confused
Look at their other choices. 2- and 3-month bills are at 2.18%. Would you double or triple your maturity for 4 extra bps?

And if you want Treasuries that yield higher than 2.18% right now, you'd have to go all the way out to 20 years.

Topic Author
Revision17
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Re: Why are 1 month t-bill rates low?

Post by Revision17 » Thu Jun 20, 2019 7:43 am

I guess a better question is.. Banks can earn interest from the Federal Funds Rate by depositing money at the fed (I think?). Why not store your money at a bank instead? Is it just because T-Bills are more liquid?

Maybe the complexity of dealing with spreading your funds around many banks to keep FDIC insurance isn't worth it? I'm guessing this situation where the federal funds rate is higher than 1-month t-bills is rare enough that products haven't been developed for it?

SovereignInvestor
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Re: Why are 1 month t-bill rates low?

Post by SovereignInvestor » Thu Jun 20, 2019 7:51 am

Great question .

I think bevause the treasury market includes all people not just Fed member banks.

If a large institution wants to park short term money the most direct way is 1 month treasury in open market and not via Federal Reserve system.

Also the fed pays interest on excess reserved at a rate lower than FFR, right?

Grt2bOutdoors
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Re: Why are 1 month t-bill rates low?

Post by Grt2bOutdoors » Thu Jun 20, 2019 10:00 am

Revision17 wrote:
Thu Jun 20, 2019 7:43 am
I guess a better question is.. Banks can earn interest from the Federal Funds Rate by depositing money at the fed (I think?). Why not store your money at a bank instead? Is it just because T-Bills are more liquid?

Maybe the complexity of dealing with spreading your funds around many banks to keep FDIC insurance isn't worth it? I'm guessing this situation where the federal funds rate is higher than 1-month t-bills is rare enough that products haven't been developed for it?
Just because Banks are earning money on deposit at the Fed, does not make them willing to share it with you, the depositor.
What banks usually do, is offer you a sliver of yield and earn a higher rate from other investments, the difference they keep, as in keep it in their pockets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Phineas J. Whoopee
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Re: Why are 1 month t-bill rates low?

Post by Phineas J. Whoopee » Thu Jun 20, 2019 1:52 pm

Please allow me to address some misconceptions expressed upthread.

The Federal Funds Rate, FFR, is a target rate for creditworthy banks lending among themselves overnight, which includes over weekend. The Fed neither charges nor pays it.

The FFR does strongly influence short-term Treasury yields, but the Fed does not set them.

Banks do not "earn interest" at the FFR. They pay and receive it among themselves.

Large institutions do not "park" money with the Fed at the FFR. The Fed neither lends nor borrows at that rate.

Yes, the Fed pays member banks interest on their reserves. At present the rate for both required and excess reserves is 2.35%, right in the middle of the FFR target range.

No, banks do not lend reserves, except to each other.

No, banks do not keep the interest on reserves from you. Each makes its own decisions about deposit and loan rates based on its own needs and opportunities.

Bank reserves are a constraint on lending, but they are not what a bank lends to you. When a bank issues a loan it creates two things simultaneously: a bank deposit; and a debt. They are equal in magnitude but opposite in direction, so net financial assets across the economy are unchanged. As the loan's principal is repaid the deposit the bank created is destroyed, along with the offsetting debt. Net financial assets remain unchanged.

I hope that's helpful.

PJW

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