But they're safe: Treasury bills pay zero interest for first time

— -- For the next four weeks, the U.S. government is getting the same deal as some car buyers: zero-percent financing.

The government auctioned $32 billion in four-week T-bills at 0% interest Tuesday, the lowest auction rate ever.

The credit crisis has investors so worried, they simply want the government's guarantee of safety even if they don't earn any interest.

"Clients are looking for a safe harbor from whatever terrible things may be out there," says Deborah Cunningham, chief investment officer at Federated Investments. "It has nothing to do with returns."

Demand for the no-interest T-bills was feverish. The Treasury received $128.5 billion in bids, or more than $4 in bids for every $1 it accepted. In comparison, the Treasury sold $23 billion in one-month T-bills a year ago and received $57.5 billion in offers. The yield: 2.95%.

Big investors also may be stuffing portfolios with T-bills to look smart at year's end, when they disclose their holdings to the public, a practice called window dressing.

Most bids — $125.5 billion — came from large institutional investors.

Tuesday's auction produced the first zero-percent yield, but T-bill yields have been minuscule recently. Monday, the government auctioned three-month T-bills at 0.005%.

Some investors bought Treasury bills in the secondary market Tuesday for more than their face value, taking a small loss in return for the assurance that they would get most of their money back.

For taxpayers, the auction is a great deal. The Treasury sells interest-bearing securities to finance the nation's $10.4 trillion in debt. The government has paid $37.5 billion in interest on the debt for fiscal year 2009. "It's getting financing for a mountain of debt at no cost," Cunningham says.

Borrowers who weren't the U.S. Treasury had to pay up for short-term loans Tuesday. Top-rated non-financial borrowers could sell one-month commercial paper for 0.51%, according to the Federal Reserve. Those one notch below in the credit ratings had to pay 5.06%.