T-Bill Rates Plunge

In a stark development, three- and six-month T-bill rates plunged today. The yield on a three-month T-bill fell to 3.999% a moment ago, down massively from 4.663% Tuesday and down about a percentage point from a week ago.

The yield on six-month T-bills has fallen 26 basis points to 4.43% today and 5.01% a week ago. The yield drop reflects the following:

1. Increased bets on a Fed rate cut. The market is priced for about 40% odds of a half-point cut in the funds rate occurring by the Sept. 18 FOMC meeting, and chatter all day was over the possibility of a Fed rate cut occurring as early as this week.
2. Yield curve bets placed ahead of what looks to many like the beginning of a series of Fed rate cuts. Short-term rates fall faster than long-term rates when the Fed lowers them. The yield curve steepens.
3. Flight-to-quality buying. Enough said.
4. Surplus fed funds. The Fed has added ample supplies of money into the financial system, and this has put downward pressure on money market rates, including commercial paper rates for issues maturing in under one week's time.

By following the markets rather than leading them, the Fed's inflation-fighting credentials are enhanced. I would expect an almost immediate rate cut in response to any sign of a further seizing up of the fed funds and commercial paper markets, and of the credit markets in general, or a cut that follows many days of calm.

Waiting for calm helps the Fed put distance between events in markets and the cut, making it seem as if the cut were implemented more in response to general conditions than to an anxiety-laden crisis scenario, either obvious or not so obvious to the markets.

A swift response to a recurrence of credit problems would be rational, given the risk that the recurrence could be deeper and stronger than before, and because a recurrence would show that credit problems have been sustained.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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