T-Bill Rate Approaches Zero

 |  Includes: BIL, BSV
by: Babak

The 3 month Treasury Bill rate is an important fixed income security that I keep track of, not because I trade it but because it is a remarkably accurate gauge of panic in the equities markets. It is also very prescient in leading rate changes by the Federal Reserve board.

Thanks to its predictive qualities, I said that the Fed should lower rates as far back as last summer. When I show most people the data that proves that the Fed actually chases after the bond market they are astonished. Even a lot of traders aren’t aware of the real relationship between the bond market and the Fed.

In any case, just a few weeks ago this important rate was close to 2%, where it had been followed lower by the Fed Funds rate. But now it is 0.03% !! Two things stand out: a drastic move in a short time frame, and the fact that this is as close to zero as you can practically get. Unless I’m wrong, this is the lowest rate the US has seen for this fixed income security.

To give you an idea of the magnitude of this, here is a very long term chart of the 3 month Treasury Bill covering many other financial crisis:

long term chart of 90 day treasury bill financial crisisClick to enlarge

The chart is logarithmically scaled so each move shown is standardized as a percentage. Notice how the 1987 crash, the September 11th attacks and ensuing chaos hardly register when compared to what we are witnessing now.

Ben Bernanke famously quipped that as a last resort the Federal Reserve could always drop dollars from a helicopter… if you listen carefully, you might just hear the whine of the engines warming up for takeoff.