BIL May Be a Safe Harbor in Perilous Times

The State Street ETF provides high yields during a period of geopolitical and market uncertainty.

The SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) is a highly liquid product with over $37 billion in assets under management. The fund trades an average of more than 13 million shares daily and charges a 0.14% management fee. 

After years of short-term interest rates at bargain basement levels because of a dovish central bank monetary policy that created a flood of liquidity, the Federal Reserve responded to the highest inflation in decades by turning off the liquidity switch and shifting to a hawkish approach.

The short-term fed-funds rate rose from zero percent in March 2022 to the current range of 5.25% to 5.50%. The Fed controls short-term rates, but the market dictates interest rates for longer maturities.  

The central bank left rates unchanged at its last two meetings, but the medium- and long-term bond markets took over, with the price of the U.S. long bond falling to the lowest level since 2007.

Ten-year U.S. Treasuries fell to a level that caused yields to move over 5%. Fixed-income investments that had been out of vogue for years have made a big comeback this year.  

Higher U.S. Debt 

Financial data and geopolitical events have created a toxic cocktail for investors. While the future path of least resistance of all markets is always uncertain, the current landscape has dramatically increased uncertainty.  

The United States is the world’s leading economy, and its stock and bond markets attract worldwide capital. The U.S. national debt has risen to over $33.7 trillion. The fed-funds rate at 5.375% means the debt will increase by more than $1.8 trillion annually if spending and receipts are equal. 

Meanwhile, spending will likely increase, pushing the debt higher. Moreover, inflation remains stubborn, and rates could rise from the current level. The Fed has told markets to expect higher rates for longer.  

The bifurcation of the world’s nuclear powers with wars raging in Ukraine and the Middle East only complicates the economic landscape. The Doomsday Clock is 90 seconds to midnight, the “closest to global catastrophe it has ever been.” The bottom line is uncertainty is high because financial and political factors are a mess.  

S&P 500’s Peak 

U.S. stocks are the traditional home for investors to grow nest eggs for new home purchases, school tuition, major purchases and most importantly, retirement. 

The S&P 500 record a peak in January 2022. After a 27.5% decline from the early 2022 high to the October low, the index rallied to a lower high in July 2023, where it ran out of upside steam. Over the past months, the selling caused more than a bit of indigestion for investors.  

TLT’s Low Price 

Adding insult to injury, the 60-40 retirement mix between stocks and bonds experienced a bearish double whammy over the past months. Stocks declined, and bonds plunged.  

The three-year chart shows the bearish trend of the iShares 20+ Year Treasury Bond ETF (TLT). 

In October, the product that tracks long-term U.S. Treasury bonds fell to its lowest level since 2007. 

Rising rates have weighed on stocks and investment portfolios. As the bonds declined, long-term savings tucked away in bonds suffered significant mark-to-market losses.   

Meanwhile, even the darkest clouds have a silver lining, and the bond market now offers some of the most attractive yields in years, if not decades. The U.S. 10-year Treasury recently rose above 5%, offering investors willing to hold the debt securities until maturity an over 60% return.  

Liquid ETF 

Fixed-income products have become very attractive. Government bonds offer guaranteed returns for buyers willing to hold them until maturity. Investors have been limiting risks in the current uncertain investment landscape. 

Shortening exposure along the yield curve limits exposure if rates continue to rise in a falling bond market. If rates increase, a short-term approach to bond investments allows for re-investment at higher rates.  

For investors feasting on fixed-income products, BIL is a liquid home for savings during perilous times with the highest interest rates in years.  

BIL’s Flows 

Following the fund flows highlights BIL’s popularity this year.

The chart shows over $12.7 billion has flowed into BIL in 2023. Moreover, the pace of positive flows increased in October and November.  

Investors have flocked to BIL as a safe harbor in the current environment. If the Fed keeps rates higher for longer, expect the trend to continue.