An Examination of Treasury Term Investment Interest Rates

Abstract

In November 2003, the Term Investment Option (TIO) program became an official cash management tool of the U.S. Treasury Department. Through TIO, the Treasury lends funds to banks for a set number of days at an interest rate determined by a single-rate auction. One reason why the Treasury introduced TIO was to try to earn a market rate of return on its excess cash balances. This article studies 166 TIO auctions from November 2003 to February 2006 to determine how TIO interest rates have compared with market rates. The author investigates the spread between TIO rates and rates on mortgage-backed-security repos, a close benchmark for TIO rates. He finds that aside from offerings with very short term lengths, the Treasury receives an interest rate on TIO auctions comparable to market rates. He also documents a negative relationship between an auction's size and the spread between TIO and repo rates. Furthermore, the Treasury's announcement and auctioning of funds on the same day does not adversely affect rate spreads, a finding that suggests that banks are indifferent to more advance notice of TIO auctions.

Keywords: Treasury, Term Investment, Auction

JEL Classification: G28, E43