Yesterday I mentioned that the U.S. Treasury was able to raise $40 billion in a one-day auction of 35-day Treasury bills. When you bid for these investments, you could either compete with others by offering to invest at the lowest interest rate you’re willing to accept or bid “non-competitively,” accepting whatever the Treasury Department determines the rate will be. Many people are willing to lend money to the government at a rate of 0%. That sounds like a horrible deal, but here’s a few reasons why investors will bid 0% on a short-term Treasury bill.
The stock market is likely to decline. With the media reporting to collapse of Wall Street, putting your money in an investment earning 0% is a better proposition than leaving it in stocks poised to lose money in the short term. I don’t suggest market timing or guessing what the stock market will do over the short term. Did you know on Wednesday that the S&P 500 was going to be up 4.3% on Thursday? I didn’t. Nevertheless, there are situations where not losing money (in a 0% T-bill) is a better option than probably losing money (in the stock market).
More banks are likely to fail. Washington Mutual still seems to be the bank that the media is giving a hard time. It is quite possible, however, that the next bank to fail will be a surprise. As long as your money is protected by the FDIC, you will be able to withdraw your funds. You may not be able to access your funds as quickly as you like, however. Moving your savings account to a Treasury bill might earn you less interest — or it might not — but you’re guaranteed to be able to access your funds. Accepting a low interest rate is a trade-off for much less risk in a volatile environment.
Just because you bid 0% doesn’t mean you’ll get 0%. When the Treasury bill auction ends, all winning bidders get the same interest rate. Winners are chosen from the bottom up, so a low bid helps to guarantee you’ll win. But all investors will receive the interest rate of the highest winning bid. In Wednesday’s auction for 35-day T-bills, the highest interest rate accepted was 0.3%, so this is the rate all winning bidders, even those who bid 0%, received. Now 0.3% isn’t much higher than 0%, but it does match what you might be earning in a standard brick-and-mortar savings account. Bidding 0% means you won’t be bidding too high to be excluded from the issuance.
You expect the dollar’s value to increase relative to a foreign currency. If you live in Japan, for example, and do all your banking in yen, a low interest rate in USD might be a good investment if you expect the dollar to increase against the yen. If the dollar gains an annual rate of 5% against the yen over the period of the Treasury bill and your yield on the T-bill is 0.3%, then your returns after conversion back to yen would be similar to a local bank account earning 5.3%.
Bidding 0% on a Treasury bill doesn’t sound like a bad idea right now, particularly if you think the other options available for short-term investments are worse.
Published or updated September 19, 2008.