US government debt managers may be envious of many European countries that are able to sell debt with a negative yield. The Federal Reserve has made it clear that it intends to begin normalizing interest rates when it becomes more confident that its mandates will be achieved. Fed officials think such an opportunity will present itself later this year while a number of market participants doubt that it will hike rates this year.

Nevertheless, US T-bill yields are near zero. Today the four-week and three-month bill rates are a single basis point. The six month bill is yielding 7 bp. The yield on the shorter dated bills turned negative at the end of April.

The low yields are not a reflection of expectations of Fed policy. Rather they can be explained through simple supply and demand functions.  Essentially, supply is limited, and demand is robust. In fact, with last week’s quarterly refunding, the US Treasury indicated it would boost bill supply.  It did not provide details of amounts or timing.  

Outstanding bills have fallen by nearly a third in recent years, and some see additional shrinkage of the supply before the government steps up its issuance. Bills now account for around 11% of total Treasury issuance.

Demand has been bolstered by new regulations, especially for money market funds.  In fact, some fund managers have begun offering money market funds solely invested in US bills to minimize the regulatory burden.  

The yield of the generic four-week T-bill has not been above two basis points since April 17. It fell to -4 bp on April 30. The average over the last 20 days is less than half a basis point. The generic three-month bill has traded one day above 2 bp since April 2. The 20-day average is just shy of 1 bp.  

The US Treasury will sell $48 bln of bills today, equally divided between three- and six-month bills today. Last week the auctions generated a high bid of 1.5 bp and 7 bp respectively. It will sell four-week bills tomorrow. The high yield of at last week’s auction was zero.