June 25 (Bloomberg) -- Among the markets that say President George W. Bush is doing ``a heck of a job,'' the one he can take the most satisfaction from is U.S. Treasury bills.
That's because the unexpected surge in tax receipts may pare the budget deficit by 39 percent to $150 billion this fiscal year, causing a relative scarcity of four-week, three-month and six-month bills. The result is the biggest bull market for Treasury bills since the terrorist attacks on Sept. 11 drove investors to the safety of the securities.
Individual and corporate income tax revenues are growing for a fourth straight year in spite of five rounds of Bush tax cuts totaling about $2 trillion from 2001 to 2006. With less need to borrow, the government has cut sales of bills. The supply, which peaked in March 2005 at $1.06 trillion, fell to $919.1 billion at the end of May and will drop by about $160 billion this quarter, a record.
Treasuries ``are among the best liquid assets in the world, and low deficits keep them scarce, and yields low,'' Robert Mundell, a professor at Columbia University in New York and winner of the 1999 Nobel Prize for economics, said in an e-mailed response to a question.
Yields on three-month bills tumbled last week to a 16-month low of 4.53 percent, about three-quarters of a percentage point lower than the Federal Reserve's 5.25 percent target for the overnight lending rate between banks. The last time bill yields were that far below the federal funds rate was after the terrorist attacks in New York and Arlington, Virginia, in 2001.
`A Heck of a Job'
Along with record highs in the Standard & Poor's 500 Index of large-company shares and the smallest yield premiums on the riskiest corporate bonds in the past month, low bill yields are a sign of confidence. Bush's approval ratings are at record lows because of the Iraq war. Bush drew a 32 percent approval rating in an AP-Ipsos poll on June 7 and 28 percent in a Newsweek poll on May 5.
Voters are even less fond of Bush than in September 2005, after he praised Federal Emergency Management Agency Director Michael D. Brown as doing ``a heck of a job'' managing the recovery of New Orleans and surrounding areas devastated by Hurricane Katrina. Brown stepped down 10 days later.
Financial markets say the voters are wrong. Three-month bill yields averaged only 13 basis points lower than the federal funds rate in September 2005. The S&P 500 is up almost 25 percent, and high-yield bond spreads are almost a percentage point narrower, according to Merrill Lynch & Co. The average yield premium was 266 basis points as of June 21, compared with 354 in September 2005. A basis point is one one-hundredth of a percentage point.
`Not Over'
``Treasury bills, more than anything, reflect'' the smaller supply of government debt, said James E. Glassman, senior U.S. economist at JPMorgan Chase & Co. in New York. ``Because this year was such a blowout for Treasury, to prevent cash from piling up they offer fewer Treasury bills.''
Bills rallied in the past month even as longer-maturity Treasury notes and bonds were routed by traders paring bets that the Fed will lower rates this year. The benchmark 10-year note's yield touched a five-year high of 5.32 percent on June 13.
Yields on 10-year notes fell almost 4 basis points last week to 5.13 percent, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent security due in May 2017 rose 8/32, or $2.50 per $1,000 face amount, to 95 4/32. Treasury yields, which move inversely to prices, declined further today, pushing the 10-year yield down 5 basis points to 5.08 percent at 9:55 a.m. in New York.
``This is not over,'' said Eric Diamond, who trades Treasury bills and notes maturing within 18 months at Goldman, Sachs & Co. in New York. ``I predict pressure to continue in the bill sector for at least another two weeks.''
`Bills Bear The Brunt'
Demand for bills normally increases at the end of each quarter from companies and fund managers who want to hold low- risk investments, Diamond said. Record assets in money-market mutual funds are helping keep prices high, he said.
Assets in U.S. money-market funds rose to a record $2.499 trillion in the week ended June 19, according to iMoneyNet, a Westborough, Massachusetts-based company that tracks the funds. Money-market funds invest in short-term debt securities and maintain a constant share price of $1. Their average yield rose to a six-year high of 4.77 percent in the week ended April 3 and was 4.72 percent last week.
Through June 21, the government had collected $1.59 trillion in individual and corporate income taxes, an increase of 7.7 percent from the year-earlier period. Income tax revenue increased 16 percent in fiscal 2006, 21 percent in fiscal 2005, and 7.9 percent in fiscal 2003.
Fewer Sales
``Tax receipts have run ahead of Treasury's plan, and bills bear the brunt of the miss in Treasury's forecast,'' said Tim Huyck, who manages $92 billion in government money-market funds in Merrimack, New Hampshire, for Fidelity Investments. ``There are fewer bills and the same amount of buyers.''
The deficit for the fiscal year that began Oct. 1 was $148.5 billion at the end of May, 35 percent narrower than the shortfall of $227 billion in the same period a year earlier, according to the Treasury Department. For all of this year the budget shortfall could narrow to $150 billion, the Congressional Budget Office said May 4. That would be the smallest deficit since the U.S. posted a surplus in fiscal 2001.
The government reduced sales of bills in order to maintain the sizes of its note and bond auctions. While cutting the supply of bills in each of the past two fiscal years, the government increased the supply of notes and bonds by $262.9 billion in fiscal 2005 and $206 billion in fiscal 2006. Bills account for about 21 percent of the Treasury's $4.37 trillion in debt outstanding, the smallest share since October 2000.
`Super Expensive'
``There just haven't been enough bills available for investors who have to buy them,'' said Louis Crandall, chief economist at Wrightson ICAP, a Jersey City, New Jersey-based research firm specializing in Treasury finance.
The supply of bills is likely to rebound by about $80 billion during the second half as the growth rates of corporate and individual tax revenue slow, Crandall said. The Treasury Department decided in May to discontinue sales of three-year notes, in part to enable it to ``rebuild'' issuance of bills.
``Over the coming weeks we expect the Treasury to begin ramping up supply again,'' said David Glocke, who manages $24 billion of short-term securities at Vanguard Group Inc. in Valley Forge, Pennsylvania.
Growth in Social Security and Medicare costs will create larger deficits in coming decades as the U.S. population ages and health care costs increase, according to projections by the Congressional Budget Office.
Greenspan's Choice
Some investors are willing to accept yields lower than the overnight lending rate because Treasury bills, which mature four, 13, or 26 weeks after they are issued, are the world's most secure investment. Alan Greenspan's largest personal investments were in Treasury bills during his tenure as Fed chairman, which ended last year.
The average yield on money-market funds that hold only Treasury debt was 4.22 percent last week, the lowest since October, according to iMoneyNet. In the past year it's been as high as 4.43 percent on April 10.
``It's very difficult to find anything to buy, because dealers just don't have a lot of bills in inventory,'' said Karen Wiggan, who manages $8.1 billion in money-market funds at Charles Schwab in San Francisco, including a fund that invests only in Treasuries. ``The market becomes super expensive.''
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net
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