When real government interest rates are at zero percent or actually turn negative, what does that tell investors? If investors are willing to lend the government money without receiving any interest payments – or worse yet are willing to pay the government to lend it money – does that send a message of confidence to other investment vehicles such as stocks?

U.S. Treasury unlikely to adopt negative T-Bill interest rate policy

A Wall Street Journal report today outlines the dilemma of zero or negative real interest rates, wondering if the U.S., like certain rates in Europe, could actually turn negative. It “might send a mixed signal to markets about investors preferring to lock in a loss with the U.S. Treasury rather than invest their money elsewhere,” Kenneth Silliman, head of short-term rates trading at TD Securities Inc, a primary dealer, was quoted as saying.

The short answer from author Min Zeng is that no, analysts are skeptical that the Treasury would embrace a policy where an investor pays $102 for a T-Bill but it only returns $100 at maturity.

What recently happened when the U.S. Treasury conducted a series of Treasury auctions recently where short-term government debt yielded zero real interest was more a reflection of the current debt ceiling debate issue. Treasury supply has experienced a forced reduction in supply recently due to the debt ceiling. The reduction in supply means that interest rates move lower and the price of the bills moves higher, a natural free market reaction – to a degree.

How much of a free market is willing to lend money without any interest rate payments? What is the investment rationale for a manager receiving zero interest rates? Can a zero interest rate T-Bill be sustainable?

Short term interest rates have been zero 46 times since 2008, accounting for nearly 3 percent of the float

The report interestingly notes that from September 2008 to present the U.S. has sold short term government debt maturing in less than a year for a yield of zero 46 times. The $1.7 trillion in short term government paper, however, represents just 3 percent of the total T-Bill supply during the period.  Recently some bills maturing in less than a few weeks returned negative rates by just a series of basis points, but such moves don’t appear to be the prevailing opinion.

“I don’t think the Treasury would make a major policy change based on periodic episodes of the debt ceiling,” Joseph Abate, a money-market strategist Barclays Plc, a primary Treasury debt dealer, was quoted as saying. “I don’t think demand for negative yields is deep enough to justify” negative-yield bill auctions, he said.