Who Wants a Free ETF Lunch? T-Bills Still Yield 5%

I used to look at the U.S. Treasurys yield curve about once a year. Now I check it once a day – and I’m not alone. Interest (pardon the pun) in bonds of all types has increased sharply since the Fed started to raise interest rates from near zero in 2022. Fast forward to early 2024, and we’ve seen nothing short of financial heroics from the likes of iShares 20+ Year Treasury Bond ETF (TLT). This ETF surged in assets and price during November and December. 

But the uptick looks temporary. After giving back about 6% since late last year, TLT and the bond market in general now show early signs of reversal. Instead of crystal ball gazing, let’s just say that while financial advisors and investors have spent the past few months in perhaps an unfamiliar area (owning bond ETFs), the opposite end of the yield curve still delivers. And it’s doing so in a manner that lacks the hype and drama surrounding much of the bond market. 

The current goings on in bond ETF land are akin to hitting a fancy steak house, eyeing the menu for several long minutes, then finally hearing your friends scream, “Just order a steak!” T-bill ETFs are constantly treated as parking places for assets, much like money market funds with ticker symbols. But they have stayed at yields north of 5% for a while now.  

Higher for Longer, T-bill Edition 

The murkier the market picture becomes, the more certain funds start to play a much more important role than just a “cash-stasher.” These include two 17-year veterans: the SPDR Bloomberg 1-3 Month T-bill ETF (BIL), a $33.6 billion ETF, and the iShares Short Treasury Bond ETF (SHV), an $19.1 billion product. The longer rates stay up, the more time investors have to avoid panic buying into either dips or rips in the stock market.  

Since the start of October, the 10-year U.S. Treasury bond yield has dropped 50 basis points (0.50%) from 4.6% to 4.1%., That has prompted many on Wall Street to see long-term bonds as a generational opportunity to lock in the highest rates in years and embrace the potential for capital gains should rates continue to fall. 

But during the same period, three-month T-bills have moved from slightly above 5.5% to slightly below that level: in other words, not enough for many investors to notice. Even at six months to maturity, rates are still up at 5.2%, versus around 5.5% in October.  

The biggest advantages of sustained higher yields at the very short end of the curve comes down to comfort: that is, high rates provide a healthy dose of it in a market still uncommitted to hitting new highs. There is also the “wait it out” factor; investors could have locked in around 5.5% annualized six months ago. Even as those T-bills are maturing, 5.2% is still there for the taking.  

High Yields, Capital Preservation

The longer this goes on, the more visibility investors get, getting paid to wait on things such as the ultimate candidates in the U.S. Presidential election; the reappearance (or disappearance) of recession probability and inflation; and who will win the Super Bowl. While two out of three matter to investors and advisors (except for those who follow the quirky Super Bowl Indicator), 15 years have passed years since we could enjoy the luxury of rates that were not near zero. 

Investing doesn’t have to be so difficult. T-bill ETFs exist in many varieties, and investment advisors should remind clients that “settling” for 5% or higher yields is not a reason to avoid paying their fee on those assets (as some clients tend to ask when money is in cash).  

Instead, it could turn out to be one of the savviest decisions of 2024 – just as for most of 2023, when the average S&P 500 stock was flat or down through the first 10 months of the year.