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Tuesday, December 09, 2008 7:42 PM


Huge Demand For Treasuries As Banks Refuse To Lend


The rush to safety is on. Treasury Bills Trade at Negative Rates as Haven Demand Surges.

Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

“It’s the year-end factor,” said Chris Ahrens, an interest-rate strategist in Greenwich, Connecticut, at UBS Securities LLC, one of the 17 primary dealers that trade directly with the Federal Reserve. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.”

The benchmark 10-year note’s yield dropped seven basis points, or 0.07 percentage point, to 2.67 percent at 3:10 p.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 21/32, or $6.56 per $1,000 face amount, to 109 12/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began.

The two-year note’s yield fell nine basis points to 0.85 percent. It dropped to a record low of 0.77 percent on Dec. 5.

If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.
Treasury Yield Curve



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Chart Courtesy Of Bloomberg

Rates of zero percent are not synonymous with inflation concerns, nonetheless there have been many screams from inflationists about the soaring supply of base money. Let's take a look.

Adjusted Monetary Base



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Base Money Chart Courtesy Of St. Louis Fed


Base Money %Change From A Year Ago



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Base Money Chart Courtesy Of St. Louis Fed

The only other time we have seen base money supply soar like we have now was during the great depression and World War II, neither of which was a hyperinflationary event to say the least.

Furthermore, the only other time we have seen a chart pattern on base money identical to that that preceded the great depression is right now. History is repeating and it sure is not saying inflation.

Printing Not Making Circulation

M1 Money Multiplier



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M1 Money Multiplier Chart Courtesy Of St. Louis Fed


The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base. the plunging ratio suggests that little of this base money is actually making its way into M1.

Reserve Bank Credit Soars



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Reserve Bank Credit Chart Courtesy Of St. Louis Fed


Look at the Base Money chart and the Reserve Bank Credit chart. Base money is soaring but all of it is sitting in bank reserves. In other words, banks are not lending. Clearly we have a huge monetary distortion, but banks seem to understand that lending money in this environment would do nothing but increase losses.

People have been asking me for years where the demand from treasuries would come from if China stopped buying. My answer was "I doubt China stops but if they do, internal demand in the US will easily pick up the slack". That has indeed been proven to be the case.

This money supply increase will matter at some point, but in light of credit destruction and falling asset prices, the point at which it does matter may be much further out that most think. And for now anyway, exit strategy concerns of the banks and the Fed appear to be tossed to the wind.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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