What Zero Yield in Treasury Bills Signal for Currencies

Although currency and stock traders can’t figure out whether this is a bottom or a pause before more losses, the sentiment in the bond market is very negative.

For the first time since the US Treasury started selling 4 week T-bills in 2001, the yield hit zero. In other words, bond market investors are willing to buy T-bills at a negative real yield, which means that it earns less than cash. This drove the rates on 3 month bills to negative 0.01 percent, reflecting the market’s hunger for safety.

The only reason why anyone would buy Treasury bills at negative real return is if they believe that recession will deepen, driving bond prices higher and yields further below zero.

From my experience, the bond markets tend to have it right which suggests that we may see further losses in the currency and equity markets this week. The only thing that could help would be a bailout for the automakers and even then, the positive impact on investor sentiment may be limited.

Fed fund futures are now pricing in a 98 percent chance that the Federal Reserve will cut interest rates by 75bp to 0.25 percent on December 16th:

Fed Fund Futures

Photo: Bloomberg

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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