Interest rates on short-term Treasury bills fell in Monday's auction with rates on six-month bills dropping to the lowest level on record and the three-month bill falling close to its all-time low.
Rates also fell in a separate $10 billion auction of bonds that protect investors against inflation.
The declines are good news for the government's efforts to hold down borrowing costs but bad news for savers who rely on interest income.
The Treasury Department auctioned $24 billion in three-month bills at a discount rate of 0.040 percent, down from 0.080 percent last week. Another $25 billion in six-month bills was auctioned at a discount rate of 0.130 percent, down from 0.180 percent last week.
In a separate auction, Treasury sold 10-year bonds that protect investors against inflation at a yield of 1.430 percent, down from 1.510 percent the last time these securities were auctioned on Oct. 15.
It was the lowest rate for these bonds, known as Treasury Inflation-Protected Securities, or TIPS, since the 10-year TIPS brought 1.250 percent on April 10, 2008. It was the largest TIP offering in five years and represented an effort by the government to boost sales of these securities to meet the demands of big creditors including China and Japan.
TIPS offer investors a way to hedge against inflation because their yields are tied to increases in the government's Consumer Price Index.
The drop in the six-month Treasury bill rate marked the latest in a series of record lows for this security going back to last fall.
It was the lowest point for the three-month bills since that security hit an all-time low of 0.005 percent on Dec. 8, 2008. The records on three-month and six-month bills go back to the late 1950s when the government began auctioning these bills on a weekly basis.
The low interest rates have kept the government's borrowing costs low. Yet once the economy rebounds on a sustained basis and the Federal Reserve starts raising interest rates to guard against inflation, the government's interest payments are likely to soar given the size of projected budget deficits. The federal deficit hit an all-time high of $1.42 trillion last year and it is projected to rise even higher this year.
The low rates reflect an effort by the Fed to drive short-term interest rates down as a way of jump-starting economic growth.
The central bank pushed it target for overnight bank loans to an all-time low of zero to 0.25 percent in December 2008 at the height of the financial crisis. It has left the rate there for more than a year. Many economists do not believe the central bank will begin raising rates until the unemployment rate begins falling on a sustained basis, something they do not expect to occur until mid-year.
The discount rates reflect that the Treasury bills sell for less than face value. For a $10,000 bill, the three-month price was $9,998.99 while a six-month bill sold for $9,993.43. That would equal an annualized rate of 0.041 percent for the three-month bills and 0.132 percent for the six-month bills.
Separately, the Federal Reserve said Monday that the average yield for one-year Treasury bills, a popular index for making changes in adjustable rate mortgages, fell to 0.41 percent last week from 0.47 percent the previous week.
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