Is NIRP Upon US? Will The Fed Be Yellen BOO?

Submitted to us by a Naybob of IT...  30 day T-bills sold at zero yield in five of the six most recent US Treasury auctions. In the secondary market, some bills have traded at negative yields for a while.  Investors holding these bills to maturity end up with a guaranteed loss.  Why would these investors be willing to pay this price, just to keep their money safe and liquid? What do they know?

Cash in a bank earns more, but due to FDIC limitations (for smaller investors) and or in the event of a systemic collapse, could be effectively UNINSURED.  Large investors, such as MMF's (money market funds) which are backstopped by current central bank monetary policy; (ZIRP) zero interest rate and (IOER) interest on excess reserves, don't want their cash going up in smoke during a crisis.  So this is a flight to safety, but from what?

The gross national debt has been hitting the ceiling for months and the Treasury can only sell new debt to replace maturing debt.   The projected date when the government runs out of money is Nov. 5th.  So there’s another confirmation of a supply issue for short term on the run HQLA (high quality liquid assets) which market making and liquidity depends upon.  What supply issue?  

In order to prop up their markets and currencies many EM's and BRIC's are liquidating ten (10) year UST's.  The waterfall of dollars from which has temporarily stalled the "dollar" squeeze vis a vis the petrodollar, eurodollar and asiadollar markets.  Since January 2015, China has been diverting those dollars for direct purchase of 70% of all cargoes from the Dubai oil market (90% in August from Abu Dhabi, Oman and Dubai). Oil prices have been buoyed of late and VLCC rates jumped 50% as a result of all the oil China and India are putting into their strategic reserves. What happens when they run out of space?

However, NOBODY is dumping shorter duration T bills nor will they be in the near term. Not even the Fed has enough as during QE3 they could no longer sell short dated to buy long dated, as they (due to limited Treasury issuance) had insufficient holdings.  Double take, read that again, the FED had INSUFFICIENT HOLDINGS to perform a POMO (permanent open market operation). And if you want to know how hoarded to the point of being scarce short term on the run HQLA is, read this.

There is a dearth of shorter duration on the run collateral that might just be at the center of an impending market liquidity event. NEGATIVE rates (i.e. 3 month US T-bill starting mid Sept, Switzerland 10 year, other Eurozone countries) tell you everything you need to know about the current market liquidity stress level - as in not large, but great. Other asset classes are perceived as higher risk, or over inflated and many are liquidating to cash or equivalent.

Rising rates? Do you really think the Fed would do anything to jeopardize its $4.5T balance sheet which has a massive asset liability duration mismatch? Rising TREASURY rates would mean their short term liability costs would rise and their long term asset values would shrink. Central banks do not like getting sandwiched or double ended.  But they do like protecting and maximizing their portfolio.  

Due to currency based carry trades and corporate debt margins being razor thin, even a temporary 25 bps Fed raise (retracted at the following meeting) could instantly crater the equity markets.  This would spook TRILLIONS of global equity money into the UST bond market. Food for thought, as all Janet has to do is Yellen out a Halloween or Grinch-like Christmas BOO!!!

Widening CDS (credit default spreads) are also telling a story of debt contagion and increased stress levels. Its not if, but when, HY (high yield), leveraged, junk and even higher grade corp bonds start blowing up. Couple that with equities potential toasting, risk premia rising, and in a flight to safety, everybody will come running to UST's, and those T-bills will become not gold, not platinum, but DIAMONDS. Why? The USA has NEVER defaulted. Given the situation in China, Japan and Europe, at the moment, even if we enter recession, a likely Q4 2015 or Q1 2016 event, we are still the least dirty shirt in the laundry.  

Meanwhile, quietly through the rehypothecation or asset alchemy of QE, repo and reverse repo, the Fed has managed to convert bond script or government debt as collateral to better than cash. The Central banks seem to be collapsing the liquidity infrastructure, and at the end of the day, UST's, Bunds et al or government debt, may be the only product that has any liquidity left to it.

Despite the current rally and declarations that all is well in the equity market OZ, it's interesting that the NIRP (negative interest rate) investors, for some reason, obviously can't see clearly now. What is it they see? Is the rain not gone? Does the possibility of a long fabled great "confiscation" exist?  

Along those conspiratorial and not so conspiratorial lines, NIRP may be upon us, and if so, idle cash in the form of checkable deposits, will effectively be taxed and T-bills will not. As pictured above and at the top of this missive, poor little Cindy Boo Who from Whoville will have to PAY additional fees to leave her checking and savings in that nasty Grinch's Bank. Food for thought, stay thirsty my friends.