As Fed credibility collapses in a pile of failed communications, Bloomberg notes that the $1.5 trillion market for U.S. Treasury bills, known as an oasis of stability for investors worldwide, is experiencing the most volatility since the financial crisis.
Since September's farcical Fed fold, T-Bill yields have seen a visibly notable increase in volatility - extra- and intra-day...
As Bloomberg reports, the gyrations underscore how it’s a precarious time for investors in bills and other instruments in the money market, which the Fed uses to implement policy changes. Asset managers looking to park cash in the short-term securities have to navigate officials’ efforts to normalize interest rates while also adapting to post-crisis rules.
Skepticism toward the Fed’s plans to boost its overnight target, following liftoff from near zero in December, is fueling the volatility. Futures assign a 2 percent chance of an increase at officials’ June 14-15 gathering, and the probability doesn’t exceed a coin toss until December.
“The Fed has hiked once already, so we are in a tightening cycle, but there is enough uncertainty about what that will look like,” said William Marshall, an interest-rate strategist in New York at Credit Suisse Group AG, one of the Fed’s 23 primary dealers.
“The other big uncertainty, where there is still a lot of debate, is what is going to be the end state for front-end demand once the money-fund reforms go into effect.”
While this huge market is the so-called "safest" place to park cash in the world, based on the average daily range swings, T-Bills have not been this 'risky' since 2009...
Regulatory changes are also driving the volatility...
On Oct. 14, Securities and Exchange Commission rules take effect that may lead investors to shift into money-market funds focused on government debt, from prime funds, which typically buy commercial paper. The new regulations mandate that institutional prime funds report prices that fluctuate, rather than sticking to $1 per share. The measures also allow fund companies to use steps such as redemption fees to prevent runs in times of panic.
Amid all the changes, which have already led many money-market companies to alter their offerings, institutional investors may pull about $400 billion from prime funds, JPMorgan Chase & Co. predicted in the first quarter.
The combination of fluctuating Fed bets and purchases of bills related to regulatory changes will spur volatility, said Jerome Schneider, head of short-term portfolio management at Newport Beach, California-based Pacific Investment Management Co., which oversees $1.5 trillion.
“Until these stimuli become reconciled and resolved, we may continue to see relative repricing a normal event in this sector,” he said.
So, as with everything else The Fed touches - stocks are at their lowest volatility in years (amid the highest valuations ever) and T-Bills are the riskiest in 7 years