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Treasury bills, treasury bills issued with maturities of one year or less, have become one of the hottest investments. And why not?
Their yields have risen steadily since the start of 2022, with the Federal Reserve raising its short-term policy rate from near zero to 5%, and Treasury bill rates to around 5.3% for maturities of three and six months, easily outpace inflation. rate, which stood at 3.6% over the last six months, as measured by the consumer price index.
Today, people are buying treasury bills in record amounts, both at regular treasury auctions and through exchange-traded funds. Demand from retail investors jumped to $13.4 billion in April, based on non-competitive bids, a good indicator of demand from retail investors, from $1.6 billion in January 2022.
SPDR Bloomberg Treasury Bill 1-3 months
ETF (ticker: BIL) has $30 billion in assets, double its January 2022 total, while the
iShares Treasury Bond 0-3 months
The ETF (SGOV) has nearly doubled to $10 billion in the past six months, Morningstar reports. “In a rising rate environment, fixed income is back in fashion, and arguably none with as much vengeance as historically dormant Treasuries,” writes Chris Larkin of Morgan Stanley’s E*Trade division. .
Not so long ago, investors had to buy junk bonds or emerging market debt to get 5%. Even now, Treasury yields are comparable to riskier bonds such as investment grade corporate bonds, which yield 4.5%, and mortgage-backed securities, which offer 5.5%. “You are now able to get a really healthy return without taking interest rate risk,” says Dhruv Nagrath, director of fixed income strategy at BlackRock. “It reset the fixed income landscape.”
Treasury bills are an alternative to bank accounts paying low rates and, unlike certificates of deposit and corporate bonds, their interest is exempt from state and local taxes. They also compete for shares.
“US Treasuries are the safest and easiest alternative to money markets and low-rate bank deposits,” says David Feinman, a private investor and former high-yield bond trader. “Three to six month maturities are now the most attractive to me, maximizing yield with reasonable liquidity.”
The Treasury auctions four-week, eight-week, 13-week, 17-week and 26-week Treasury bills every week and 52-week Treasury bills every four weeks. Individuals can buy bills through the TreasuryDirect.gov website, with a minimum of $100, or through regular auctions through brokerage firms such as Fidelity and E*Trade, usually without paying fees. Treasury bills are sold at a discount to their face value, with investors paying a face value of $100 at maturity. The difference is the interest payment. For example, a 17-week note was sold last week at $98.26, with investors receiving $1.74 at maturity in interest. Conventional bonds typically sell at face value and pay cash interest payments.
Many investors reinvest proceeds from maturing treasury bills into new treasury bills, a process known as rolling over. It is preferable to keep a treasury bond until maturity; selling before the redemption date can be costly due to fees charged by stockbrokers.
Treasury bill ETFs simplify ownership and provide easy liquidity and monthly income. Bid-ask spreads are tight, usually just a penny. SPDR Bloomberg 1-3 Month and iShares 0-3 Month ETFs have average maturities of just over a month, and
iShares Short Term Treasury Bonds
ETF (SHV), about three months. All three sports have returns above 4.5%.
| ETF / Symbol | Total assets as of 01/31/22 (bil) | Total assets as of 05/22/23 (bil) | Expense ratio | 30 Day SEC Yield |
|---|---|---|---|---|
| SPDR Bloomberg 1-3 Month T-Bill / BIL | $14.5 | $30.0 | 0.14% | 4.66% |
| iShares / SHV Short Term Treasury Bonds | 13.9 | 20.3 | 0.15 | 4.84 |
| iShares Treasury Bills 0-3 months / SGOV | 1.0 | 10.4 | 0.05* | 4.87 |
| Goldman Sachs Access Cash 0-1 year / GBIL | 2.0 | 5.4 | 0.12 | 4.57 |
*Net expense ratio of 0.05% to decrease to 0.12% after June 30.
Sources: Morningstar; business reports
Although the Notes are about as risk-free as a security can be, they do carry “reinvestment” risk – the next Note you buy could earn less than the one you own. Currently, treasury bills are yielding more than two-year treasuries at 4.5% and 10-year treasuries at 3.8%. But if the Fed starts cutting interest rates, bond yields could fall below 4% within a year. That would still be ample; short rates are unlikely to return to zero, where they have been for most of the past 15 years.
The debt ceiling crisis has also created a risk – the possibility of a default on Treasury debt if a deal is not reached by early June. A 21-day Treasury note was sold last week at a yield of over 6%, reflecting this concern. But the situation is likely to be resolved, and even if it takes longer than expected, the bill holders would likely be cured, just as they were when Uncle Sam delayed some payments in 1979 (partly to because of a debate on the debt ceiling).
When the cap is raised, there could be a deluge of Treasury bond issuance over two months — possibly as much as $700 billion, Goldman Sachs notes — as Washington rebuilds its depleted cash balances. This should mean plenty of opportunities to buy high yield bonds.
For investors, savers and retirees, the good news is that cash is no longer a trash can, and it likely will remain so.
Write to ANDREW BARY at andrew.bary@barrons.com
