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Treasury Bills (T-Bills) and their Correlation with Equity and Forex Markets

Any investor must keep a close eye to what happens in the bonds market. Significant changes in the pricing of government and/or corporate bonds can be used as an indicator of upcoming economic transitions. In this context, significant changes in the yield of government bonds or changes in the spread between different-maturity bonds may forecast what is about to happen in the real economy, in the equity markets and in the Forex markets. Actually there is an important factor linking every financial market and that factor is the level of interest rates.

Government Bonds Classification

Government bonds, in general, are classified according to their maturity. There are the three (3) main categories:

■ Bills –Maturing in less than one year

■ Notes –Maturity in 1 to 10 years

■ Bonds -Maturing in 10 years, or more

The marketable securities are issued as Treasury Bonds. Based on the length of their maturity they are called Treasury Bonds, Treasury Notes or Treasury bills (T-bills).

Treasury bills (T-bills)

Treasury bills are short-term securities with a maturity of less than one year that are sold in the US in denomination of one thousand dollars ($1,000). The maximum purchase can be 5 million dollars. Maturities differ:

  • 4-week T-bills that are offered each week, the bills are auctioned the following Tuesday
  • 13-week and 26-week bills are offered each week, the bills are auctioned the following Monday
  • 52-week bills are offered each month, the bills are auctioned the following Tuesday

T-bills and their Auctions

The US Treasury sells Treasury bills (1-month, 3-month and 6-month) at weekly competitive auctions. The final price is determined by the demand and the supply. Here is a link with dates of upcoming T-Bills auctions and the results of recent T-Bills auctions:


T-Bills Pricing

T-bills are issued via a bidding process and are offered at a discount. They don’t pay a fixed interest like common government bonds. Instead, the appreciation of the bond at maturity provides a return to the holder. T-Bills are priced the same way as Zero-Coupon Bonds. The final interest rate earned by holding a T-bill is equal to the appreciation of the security (difference between the initial price and maturity value) divided by the maturity value.

T-bills with longer maturities provide higher returns than shorter-maturity issues. Usually, a 6-month T-bill will be priced lower than a 3-month T-bill. That difference in the offered price generates higher returns on behalf of longer-maturity T-bill holders.

Factors affecting the Pricing of T-Bills

Treasury bills are tradable securities and their price fluctuates the same way as any other tradable debt security. Many different economic and non-economic factors influence the T-bills pricing, here are the most crucial, of those, factors:

(1) The FED monetary policy can highly affect the T-bill prices. If FED decides to raise the federal funds rate will cause the price of T-Bills and other government securities to fall. The drop in T-Bills price will keep on until the rate return on T-bills is matching the new federal funds rate.

(2) The FED is also a buyer of government debt securities. Therefore when the Fed performs expansionary monetary policies, the price of T-Bills tends to rise. The exact opposite will happen if the FED decides to sell government securities.

(3) T-bills are considered as an extremely secure investment as they are backed by the full faith of the government. Therefore when other investments become risky, investors see T-Bills as a safe-haven for their money. On the contrary, T-bills price drops when other investments become less risky and the economy is found in expansion.

(4) The level of inflation affects also T-Bills pricing. This is happening as inflation shrinks the real return rate of T-Bills and thus making investors to move to higher-return choices by selling government securities. Furthermore, when inflation rises it is highly probable that FED interest rates will go up too. In overall, the T-Bails price drops during inflationary periods.

(5) There are other (non-economic) factors that may influence the price of T-Bills, and that includes changes in market’s psychology, political risk, war, etc..

The Effect of T-Bills on Equity and Forex Markets

Global financial markets operate as a common landscape for investment, incorporating several different choices of risk and return combinations. This means that an important price shift of one market affects the combination of risk and return in all the other financial markets.

T-Bills and Equity Markets

When the economy is doing well and the stock-market is rising, investors tend to accept more risk by selling fixed-income securities (such is T-Bills) and by buying stocks, ETFs, etc. That situation affects negatively the price of T-Bills, T-Notes and government Bonds. In 2007, as the stock-market was booming, the US 10-year bonds yield exceeded 5.00%. On the contrary, in 2008, and as the stock-market crashed, the yield of the same US bond (10-year) dropped close to 2.00%.

T-Bills and the USD

The bond market of any country is closed related to the respective domestic currency. Bonds and currencies are linked to the current interest rate, fundamental data, political risks etc. As concerns the US bonds, they have shown a historical correlation to USDCHF.

Chart: The US Treasury Rates and the USDCHF

The Spread between Different Maturity Government Securities

In general, a longer-maturity bond should pay a higher yield than a shorter-maturity bond, as investors are ‘committed’ to that bond for a greater period of time. By measuring the spread on two different maturity-bonds we may come to some conclusions regarding where the economy is heading. For example:

  • At times when the 30-year US bond offers considerably higher yields than the 10-year bond, the market forecast better economic conditions in the long-run
  • At times when the 10-year (yield) drops considerably faster than the 30-year (yield), the market indicates bad mid-term economic conditions
  • At times when the 10-year and 30-year bond offer similar yields, the market forecasts that the economy is entering a transition stage
  • At times of the inverted relationship, when the 10-year bond offers better yield than the 30-year bond, the market indicates future economic recession

In the following chart you may see that before the economic turmoil of 2008, the 10-year and 30-year US bonds offered almost identical yields, exactly as described in case-(3).

Chart: 10-Year and 30-Year US Bonds (2006-2015)

Source: RateCurve,



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Treasury Bills (T-Bills)

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