NEW YORK: Interest rates on some Treasury bills turned negative on Tuesday as investors scrambled for cash-like assets to guard against volatile trading that could come from Friday's payrolls data.
Demand for T-bills also surged as bond and stock fund managers sought the liquid vehicles to hold their cash as they anticipate a jump in redemptions due to the recent sell-off in bonds and stocks.
In addition, money market funds scooped up T-bills and other ultra short-term investments to park cash from recent redemptions from stock and bond funds, analysts and traders said.
"This is probably a delayed quarter-end effect. Money funds are likely deploying the cash they have received due to redemptions from other areas. They are parking their cash there (T-bills) until the coast is clear," said Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg.
In early Tuesday trading, the interest rates on Treasury bills that mature later this week into late September slipped near zero. The T-bill issue due on Sept. 5 was quoted at minus 0.25 basis points to minus 1.25 basis points.
The drop in T-bill rates also led to a decline in interest rates on repurchase agreements and other money market rates.
The rate on overnight repos backed by Treasuries were quoted at 8 basis points, compared with 11 basis points from late on Monday. Repo rates backed by three-year notes moved deeper into negative territory, last traded at minus 35 basis points, while repos backed by 10-year and 30-year Treasuries traded slightly below zero in early trading.
The US Treasury Department will sell $30 billion in one-month T-bills at 11 a.m. (1500 GMT). In the when-issued market, traders expected this T-bill issue due in Aug. 1 to sell at an interest rate of 1.5 basis points, which would match the level cleared at an one-month bill auction held on Dec. 18.
In contrast, investors were reluctant to take large positions in longer-dated Treasuries. "The market's in a bit of a holding pattern as we await Friday's employment report," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
"Given the relevance of the labor market to the near-term Fed policy decisions, NFP (nonfarm payrolls) will likely set a tone for the market for the next several weeks," he added.
The benchmark 10-year Treasury note traded 3/32 higher in price to yield 2.467 percent on Tuesday, from 2.477 percent late on Monday.
The benchmark 10-year yield reached a 22-month high of 2.67 percent Monday of last week following earlier remarks by US Federal Reserve Chairman Ben Bernanke who said the central bank could slow its asset purchase program later this year.
Treasuries have since recovered a portion of lost ground as some analysts said the selloff was overdone. Fed speakers have also taken pains to point out the bank will not be ready to raise its key interest rate for quite a while yet.
Investors are now eyeing Friday's nonfarm payrolls release to gauge the health of the labor market. Fed policymakers want to see the unemployment rate fall to close to 6.5 percent from its current 7.6 percent, with robust and sustained job growth.
Economists in a Reuters poll see a net gain of 165,000 jobs in US payrolls. The release is slated for the day after the July 4 Independence Day holiday, and trading is expected to be thin at the end of the week a situation that could exacerbate volatility.
Weak manufacturing employment figures on Monday fanned speculation the payrolls figure could disappoint.
A weaker-than-expected payrolls release could actually help Treasuries prices as the more the labor market flags, the likelier the Fed is to continue its asset purchases to prop up the economy.
Conversely, a strong jobs report would likely fuel an outlook for a Fed pullback in coming months.
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