How To Lose Money On 4-Week Treasury Bills

Here is the first in what may become a series of financial market oddities brought on by the Federal government’s shutdown and the threat of a debt-ceiling related default.

I noted a report that banks were stocking up their ATMs with additional cash in preparation for increased customer demand as we approach the October 17 deadline. Another thing that caught my eye was that T-bill rates have been going UP. In fact, certain T-bills, those presumably most vulnerable to an actual missed payment, have moved quite sharply. Specifically, the October 31 T-bill yield has positively jumped over the past several days, from around 0.02% to 0.13%. It rose 0.05% just today.

Presumably as investors in the safest of safe securities begin to contemplate the unthinkable, they are concluding that October 31 might be a poor choice of maturity. So something quite remarkable has happened. For probably the first time in at least five years, since short term rates plummeted to almost 0% as a result of the financial crisis, it’s possible to lose money on T-bills. For years all they’ve done is get issued at insultingly low yields and remain there. In a different era you could lose money holding T-bills if rates unexpectedly rose, but such has not been part of the landscape for a very long time.

Nonetheless, the investor who bought the October 31 T-bill yesterday at 0.08% and then decided today to become a trader and sell them at 0.13% actually lost money even after the (admittedly paltry) interest income due for holding for one day. A net loss of $35.28 on each $1 million face value held. A beer and a sandwich for two perhaps if all you held was $1 million worth, but there are $89 billion of these outstanding so yesterday’s holders collectively suffered a mark to market loss of $3 million.

I’m sure more oddities will surface courtesy of our leaders in DC.