2 Treasury Market Trends ETF Investors Should Watch Closely

The U.S. Treasury market has a lot going on right now. 

But to simplify it, let’s just use a trio of numbers, unless of course you are less of a quant, in which case you can feel free to skip the numbers and focus on the story that surrounds each one.  

For more than a decade through 2021, the bond market was like a slumber party…without the party. Most parts of the bond market had so little return to offer in exchange for lending your money to a corporation, government or municipality, it was easy to ignore them.  

Bonds have returned to focus over the past two years—amid 11 Fed interest rate increases, high T-bill rates, and the stock market’s increasing list of worries. However, investing in them is not like it used to be. 

So, here are two parts of the bond market that deserve the attention of advisors and investors as we approach the final one-third of 2024: 

Yield Spread of -0.11% 

That’s the yield spread between the 10-year and two-year U.S. Treasuries as of last Friday. It is close to the highest level we’ve seen since it first went negative just over two years ago. To unpack that, recognize that “normal” bond market conditions are such that we’d expect a 10-year bond to yield more than a two-year note. That’s because our money is being lent to the U.S. Treasury for eight additional years, and that requires additional compensation on an annual basis.  

At least, it usually does. The two-year yield has been well more than that of the 10-year bond for the past 25 months. But now it finally appears to be narrowing. If it finally “un-inverts” to where that spread is a positive figure, alarm bells will go off, signaling that a recession is likely getting closer. That’s been the tell-tale sign for markets since about 1950. 

Three-Month Yield of 5.34% 

That’s the yield on a three-month U.S. Treasury Bill. That it is still that high is a shock, at least to me. And while it doesn’t mean that one can lock in that yield for a full year, if we simply take a proverbial $100,000 and apply that rate to it for three months, that means a T-bill of that maturity length would return about $1,335 in interest between now and the time of the US Presidential Election in early November. That’s a consideration for those worried about the markets, the election or both. 

That may explain why the US Treasury 3 Month Bill ETF (TBIL), which celebrates its two-year anniversary this week, has gathered more than $4 billion in assets. Bonds are back. Are they better than ever? That’s for each investor to decide. But they do offer a more intriguing set of circumstances than we’ve seen in a long time.