Thursday, September 18, 2008

WSJ Factual Error

From the top story in today’s Wall Street Journal:
At one point during the day, investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured....That’s never happened before.
Actually it has happened before, not in the easily available data, but it has happened – in 1938 (and apparently several other times between 1935 and 1941).

My only source is a talk by Paul Samuelson, for which I cannot even point to a transcript, but I’m confident that primary sources will bear me out. I’m too lazy to go check old copies of The Wall Street Journal on microfilm, but take my word for it.

It’s actually pretty obvious if you look at the monthly data from the Fed. For example, in February 1941, the average yield on 3-month T-bills was 0.03 percent. Considering how the yield fluctuates from day to day and from hour to hour, it’s impossible to believe that it was not negative at certain points during that month. (Technically the Journal was referring to one-month bills, but it’s a safe assumption that, if 3-month bills were selling above maturity value, so were one-month bills for at least part of the time.)


UPDATE: Paul Krugman makes the same claim (hat tip: anonymous commenter)....and I continue to believe it is wrong. I'm not sure his claim is independent: he may have gotten his information from the Journal, or they may have gotten it from the same source, which I hope they will cite so we can follow it up and judge its reliability.

UPDATE2: Reuters and the AP, both citing Los Angeles-based Global Financial Data, report that the last time the 3-month T-bill was at or below zero was January 1940. (Could it merely have been "at" zero? It seems unlikely that the bid would have stopped at exactly zero.) Another AP report says that demand sent "the yield on the 3-month Treasury bill briefly into negative territory for the first time since 1940." Friedman and Jacobson, in A Monetary History of the United States, 1867-1960, say in a footnote that "yields on Treasury bills were occasionally negative in 1940." (Apparently my "obvious" conclusion about 1941 was not correct, buy my main point stands.)

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15 Comments:

Anonymous Anonymous said...

Re WSJ factual error:

http://krugman.blogs.nytimes.com/2008/09/18/less-than-zero/

Thu Sep 18, 01:18:00 PM EDT  
Anonymous Anonymous said...

Writing that negative rates on short government securities "has never happened before" ignores the Japanese experience, where it persisted for weeks during this decade. But the WSJ has become very Amerocentric (why I read the FT).

At the very least, their claim is non-falsifiable, and therefore too sweeping to be useful anyway.

(Brief closing rant in spirit of "knzn" (some of us know a smattering of Homeric Greek):
Rage, rage of Achilles at those who bail out AIG, a non-bank firm that had months and months and months to raise enough capital, but whose inaction, arrogance and accounting shenanigans deservedly did it in...)

Thu Sep 18, 11:09:00 PM EDT  
Anonymous Anonymous said...

All very interesting.

Thu Sep 18, 11:19:00 PM EDT  
Anonymous Bill Conerly said...

Before World War II, government bonds (maybe just some) included an option; at redemption, a new bond could be purchased at less than par. The stated rates were often negative, but if you adjusted for the value of the option, they were positive. A paper was published in a major journal in the early 1980s with adjusted yields, all positive.

Sorry I don't recall more of the details.

Fri Sep 19, 01:26:00 AM EDT  
Anonymous Anonymous said...

Ahhh...war bonds; very compelling.

Fri Sep 19, 08:18:00 AM EDT  
Anonymous Jim Glass said...

Right, Japanese T-bills paid negative rates in 1998, and rates on inter-bank transactions went negative again briefly in 2003.

Switzerland offered securities that paid negative interest to foreigners in 1970s, in anticipation of exchange rate movements.

I's seen lots of references to negative rates in the US during the Depression, but don't remember any details. Doing a quick search on Google found more references but no more details, so I can't say for sure.

Sat Sep 20, 11:12:00 PM EDT  
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