I see the following t-bill rates on my screen. The date is the t-bill maturity. The yield is the bloomberg conventional yield:

 10/10/13 0.035%
 10/17/13 0.112%
 10/24/13 0.132%
 10/31/13 0.112%
 11/07/13 0.086%
 11/14/13 0.096%
 11/21/13 0.046%
 11/29/13 0.035%
 12/05/13 0.020%

 12/12/13 0.020% 

What is going on here? Let's assume that the government "defaults" (whatever that means) and the holders of the t-bills maturing on 10/17 and 10/24 cannot get their money back for a while. The market has priced "normalcy" (whatever that means) into the market with about a month.

Yet, the extra yield being paid for the 10/24 t-bills equates to about 3-4 month's worth of yield. And the Fed is going to be doing their usual system repos during that period.

Question for GZ and the t-bill arbs: Is there something funky going on? Or is this a real arbitrage?

George Zachar writes:

As far as I know it's really there. Large classes of natural t-bill holders can't take ANY risk of not getting par on dates certain.

Rocky Humbert:

Cool! So I was all excited about backing up the truck and buying some … until I realized that for every $5,000 invested, I make $0.50. ($100 per million.)

I think this anomaly may be good to watch since it's the only objective market signal for assessing the probability. And so we have a baseline unfolding. But not worth the effort to trade (yet) — since if they really do default, there will likely be much lower prices in other stuff. I'll go so far as to predict that an actual default will be worth between a 3% and 7% panic haircut on the S&P. Don't ask for historical, quantitative proof. They ain't any.  But you heard it here first…. 


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