Recently, the U.S. dropped the yield on four-week Treasury Bills to 0%.

That’s right.  ZERO percent.

When you consider the fact that some level of inflation is always afoot (even over a four week stretch), investors would be losing money by buying those T-Bills.

So, you might think that the rate drop resulted in an immediate drop off in T-Bill sales.  If that’s the case, you’d be wrong.  Reports indicate that it was actually tough to fill all of the orders.

What would possess anyone to sink their money into an investment that guaranteed zero gain and that brought with it some risk of minimal loss?  Why would you or I even consider buying a Treasury Bill that wasn’t going to make us a single penny?  What’s going on here?

First, you have to understand that these four-week bills aren’t designed for folks like you or me.  You and I wouldn’t consider purchasing a bill with no yield.  We’d be silly to do something like that when we could put into a checking or savings account and earn at least some nominal interest (with FDIC insurance behind it).  There’s absolutely no reason for you or me to place an order for a no-yield T-Bill.

Second, there are reasons for others to make the purchase.  Generation X Finance explains:

Treasuries are where institutions play. When it comes to big money market funds, and cash/income components of various mutual funds or other investments, these institutions are usually buying up treasuries. Especially with money market funds, since safety is paramount, these securities are the go-to place to find safety. That being said, this is where billions of dollars are traded. Yield, or rate of return isn’t as much of a concern as protection of principal, so the 0% rate is of little concern.

That post goes on to explain that foreign banks (including China’s) will park money in these T-Bills during periods of economic turmoil as protection against downturns.  Pension funds will also make purchases simply to protect their assets in the short run as they strive to “keep up with paying current retirees”.

What makes sense for you and me doesn’t necessarily match the needs of large insituations, foreign banks and pension funds.  They can find a reason to lock in four weeks of solid protection.

Third, some buyers might be motivated by fears of a long-term recessionary economic climate.  At least that’s how Kathy Lien at Seeking Alpha reads it.  She says, “[t]he only reason why anyone would buy Treasury bills at negative real return is if they believe that recession will deepen, driving bond prices higher and yields further below zero.”

Fourth, unlike you and me, the big boys don’t have a real alternative.  One of Lien’s readers explained this fairly eloquently in a comment.  It’s not like you can stuff billions of dollars into a mattress.  You must put the money somewhere.  If huge investors dumped their cash into those FDIC-protected accounts regular individuals used, or in other common “safe” investments, the money would end up spread over other options including the very T-Bills they could’ve just purchased in the first place.  Basically, once you reach a certain size, cash is not an option and even a 0% bill can make sense.

The moral to the story?  There is a possibility that the purchase of no-yield T-Bills foreshadows continuing economic problems, but the primary reason these Bills are purchased has very little to do with the presence or absence of interest opportunities.

Seeing headlines about ZERO percent T-Bills might be a little unnerving, but it’s not something that should probably bother everyday investors.  There are plenty of better reasons to be concerned about the economy.  If anything, the lack of a yield on these bills is one of the least frightening symptoms of the illnesses our ecoomy is currently battling.