Much is being made in the media of the recent auction of 4-week t-bills at an interest rate of zero. One possible explanation is that investors are so terrified that they are willing to accept absolutely no return in exchange for the safety of Treasuries. However, this explanation does not jibe with the strength in the stock market and the stability in reliable crisis indicators like the TED Spread.
There is an alternative explanation. We consistently hear that many institutions have not yet rebalanced, which would require a movement of additional funds into equities. According to one institutional source, this year’s stock market declines have put some pensions and endowment well below their targeted equity allocations. There may well be some “window-dressing” at work, with the money managers looking to close out the year showing smaller equity positions rather than larger. Yet institutions can only remain outside of their investment policy recommendations for a limited period without rewriting those guidelines. The $30 billion that poured into zero rate bills this week may well represent a temporary parking spot for funds intended to be deployed into the markets in January.
This is of course, conjecture, but as an explanation for zero rate bills, it is more consistent with the facts than the “safety at any price” conjecture.