Treasury ETFs in Investors’ Crosshairs as Yields Creep Higher

Treasury ETFs in Investors’ Crosshairs as Yields Creep Higher

Safety net returns to favor as two-year note approaches 5% level.

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Reviewed by: Lisa Barr
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Edited by: Ron Day

An old investor safety net is making a giant comeback  

The U.S. Treasury had its latest monthly auction of two-year notes on Monday, and they came out at a yield of 4.67%, matching 2023’s high-water mark from February. That’s the highest rate in 16 years.  

Treasury exchange-traded funds finally yield enough to be part of many investment allocation conversations.   

If you asked investors and financial advisors two years ago when they’d next see a 5% yield—at the time T-bills yielded around 0.4%—they probably would have responded “not in my lifetime.” Even at this time in 2022, yields had crept up to only around 1.6%. 

Investors took notice when the one-year Treasury bill crossed the 5% threshold in mid-February, quickly followed by the three- and six-month bills. All currently reside in the 5.3%-5.4% range.  

Even in an elevated inflation environment, that is an eye-catcher versus riskier alternatives. It’s likely producing a lot of “kitchen table” discussions for financial advisors with their clients, and among families that manage their own wealth. 

This “yield curve creep” toward a 5% rate is notable amid this strange era of sharply “inverted” yields, where T-bills earn more than 30-year Treasury bonds. Furthermore, the amount of time one can lock in close to 5% is gradually lengthening.  

All of this creates an embarrassment of riches for financial advisors and investors. Because as nice as it sounds to earn well over 5% on T-bills, those rates are only locked in for months.  

However, the opportunity to commit capital to earn, say, 4.7% a year for two years affords an investor plenty of time to sit back and see how the biggest investment uncertainties of 2023 and 2024 play out, while earning a return that seemed like a fantasy just last year.  

Sure, inflation is higher, but the bottom line is that two-year bonds have not seen the 5% level since this time of year back in 2006! 

Glamorous Alternatives 

Previously boring, irrelevant short-term Treasury ETFs are suddenly glamorous alternatives, and asset flows confirm this.  

The Vanguard Short-Term Treasury Index Fund (VGSH) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) each had under $14 billion in assets under management at the start of 2022. Now, they hold just over $22 billion and $28 billion, respectively. 

Investors will find subtle differences among many Treasury ETFs in terms of which part of the yield curve they focus on. For example, VGSH allocates among one- to three-year securities, while BIL works the shortest end of the spectrum, owning T-bills with one- to three- month maturities.  

For those who want to target a specific spot on the curve to capitalize on current rate levels, the US Treasury 2 Year Note ETF (UTWO) is one of a set of ETFs from the newcomer US Benchmark Series that seeks to always own the current two-year Treasury note.  

Another route to target a thin slice of the 30-year wide U.S. Treasury yield curve is via the iShares iBonds Dec 2024 Term Treasury ETF (IBTE). It represents its own bond ladder, with maturities allocated throughout that single year (next year), which today represents a six- to 18-month maturity range. 

“Short-term Treasuries are back” is far from the most dramatic headline in Wall Street history. But those creeping yields are providing a valuable talking point for advisors, and a welcome investment option for investors.  

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.