Yields Leap on Commercial Paper – What Does This Tell Us

Things seem pretty good in the markets these days.

Gold once again touched $1,300/oz yesterday. And there's growing talk of $1,500.
Base metals prices have remained firm. And equity indices like the Dow Industrial are near four-month highs.

Life is good, right? Investor confidence seems to be back in full force, and even the more speculative companies are once again getting a lot of love.

But beneath the surface, there continue to be some signs of nervousness.

I mentioned a few weeks an unusual spike in yields on U.S. 30-day commercial paper. That blip corrected itself the next day, as these things sometimes do. But there have been other signals since.

Yields on 60-day asset backed commercial paper have become (a little) more volatile over the past two weeks. And on Friday yields on 90-day asset backed paper leapt 35% to their highest level since late July.

The most striking thing happening lately has been falling yields on very short-dated U.S. Treasury bills.

Over the last two trading days, yields on the 4-week bill have fallen 45%, currently sitting at 0.07%. Since August 27, 4-week yields have dropped 60%. A notable move.

Falling yields mean investors are buying heavily into the 4-week bills. Which could be a sign of nervousness about the coming weeks in the markets.

During previous financial difficulties, yields on short-dated Treasuries plunged. When things go awry, many investors look to Treasuries as a "safe haven". But just in case the troubles are short-lived, these buyers don't want to tie up money for too long. So a short bill like the 4-week is an ideal place to stash cash.

As the chart above shows, the last time the markets caught the "4-week flu" was in late May and early June. At that time yields fell to the same levels seen today, as investors fled for safety in the wake of the Greek bond crisis. The move coincided with a sharp 8% drop in the Dow, and similar downward corrections in other equity markets.

Of course, there are explanations other than market panic. We're at the end of a quarter, when many investment funds reallocate capital. If funds are selling positions and then looking to buy others, they may stick the money in very short-dated Treasuries during the intervening period. Note that the previous fall in yields came at the end of Q2.

At any rate, the trend is notable. Stay tuned.

By. Dave Forest of Notela Resources