Money markets undergo sea change

Rates on Treasury bills, dollar Libor are at their highest level since 2008

Mar 13, 2018 @ 11:23 am

By Bloomberg News

While many fixed-income investors may be focused on the specter of higher long-term Treasury yields, there's a sea change afoot at the shorter end — in U.S. money markets.

The London interbank offered rate, or Libor, and rates on Treasury bills are around levels not seen since 2008. The Federal Reserve's move to tighten policy forms the backdrop for the increase, but an added force behind the surge this year has come from a deluge of supply as U.S. deficits widen.

Higher short-term borrowing costs have implications for investors and also for banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash.

"We are in a new paradigm," said Jerome Schneider, head of the short-term and funding desk at Pacific Investment Management Co. "The clear focus for the market is where will incremental demand come from to meet this supply."

The Treasury has been jacking up debt sales this quarter: Net issuance is slated to exceed $400 billion, with the bulk coming in bills. The Treasury increased the 4-week bill sale to $65 billion, from as low as $15 billion earlier in the year, with the next auction scheduled for Tuesday morning.

The march higher in Libor, which on Tuesday was set higher for a 25th straight session, has widespread consequences despite regulatory efforts to replace it following a price-fixing scandal. About $350 trillion of financial products and loans are linked to Libor, with a large chunk hinged to the dollar-based version of the benchmark. Libor is among the main indexes, along with one-year T-bill rates, used to set U.S. adjustable-rate mortgages.

Libor's spread over the overnight index swap rate, known as Libor-OIS, has widened as well, in another sign that banks face steeper funding costs. The gap has nearly doubled this year to about 47 basis points.

(More: Treasury market pummeled in its worst January since 2009)

Domestic Appeal

Meanwhile, the tax overhaul that the Republican-led Congress passed in December gave some companies less incentive to keep cash abroad, curtailing demand for unsecured U.S. dollar funding -— Libor and commercial paper — and driving rates higher.

For investors, there may be a silver lining. After years of near-zero returns, the rise in rates is boosting demand for money-market funds. Assets in U.S. government-only money funds, which include bills among key holdings, have risen to $2.26 trillion, from $2.07 trillion last year. As the Fed keeps hiking, with the next move likely this month, the influx may continue.

But for banks, the increasing appeal of T-bill rates is making them pay up to compete, through offering better returns on the commercial paper they use for short-term borrowing.

"Banks still need funding and they need to entice investors," Mr. Schneider said.

And the once-dwindling commercial paper market is reviving, with the amount outstanding on the rise.

At the same time, the surge in bill supply has boosted the amount of collateral available in the secured-funding market, pushing those rates higher. Steeper rates on repurchase agreements make it more expensive for dealers to finance debt holdings.

The leap in short-term rates also has implications for active stock investors, according to Dennis Debusschere, head of portfolio strategy at Evercore ISI, citing a study dated last year. From 1926 to 2015, some 58% of publicly traded stocks in the U.S. failed to outperform one-month T-bills, according to the paper.

With T-bills becoming more attractive relative to stocks, as the Fed moves away from the zero lower bound "and vol suppression policies become less of a focus, the inability to invest for the future will likely become a bigger headwind" for active managers, Mr. Debusschere wrote in a March 8 note.

(More: Franklin Templeton boosts bet against Treasuries)


What do you think?

View comments

Upcoming event

Sep 24


Diversity & Inclusion Awards

Attend an event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate and inspire an... Learn more

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print