Investors looking for stability and attractive yields in volatile times should consider shorter duration Treasury investments. As concerns about supply and demand imbalances weigh on longer-term bonds, the yield curve for Treasury securities has started to normalize, with higher yields on shorter duration Treasury bills (T-bills) becoming more appealing. This trend is supported by strong demand from foreign investors and money market funds, as well as the US government’s preference for shorter-term debt issuances to finance budget deficits. Moreover, as the Federal Reserve nears the end of its rate hike cycle and the Treasury General Account is replenished, supply levels are expected to decrease. These factors combined suggest that the front end of the Treasury curve will remain stable over the coming months.
T-bills, with their higher yields compared to long-term bonds and equities, offer investors an opportunity to earn better compensation without exposing their principal or taking on excessive duration risk. The SPDR® Bloomberg 3-12 Month T-Bill ETF (BILS) is a low-cost exchange-traded fund that provides exposure to the front-end of the Treasury curve. With approximately $2.7 billion in assets under management and a gross expense ratio of 0.14%, BILS aims to track the performance of the Bloomberg 3-12 Month U.S. Treasury Bill Index. This index consists of USD-denominated Treasury securities with maturities between 3 and 12 months and investment-grade ratings.
The fund holds a diversified portfolio of 26 Treasury securities, with an average maturity of 0.4 years and an average yield to maturity of 5.5%. Its short duration makes it less sensitive to interest rate fluctuations compared to funds with exposure to the longer end of the yield curve. Since its inception in September 2020, BILS has demonstrated resilience with a YTD appreciation of 3.0% in NAV and market price terms, and an annualized pace of 1.3%. While it may not experience significant gains in a rate cut cycle, BILS offers stable principal value and attractive yields for investors seeking a balance of stability and income.
In terms of the supply and demand dynamics for T-bills, issuance has been strong, surpassing $1.6 trillion year-to-date, mainly due to the Treasury General Account rebuild following the resolution of the debt ceiling issue. Although the pace of issuance has slowed down compared to Q2, auction volumes are set to increase again in the seasonally demanding October/November periods. This ongoing supply, coupled with the potential for increased longer-duration supply, suggests that shorter-duration debt exposure is more prudent at present. However, strong demand from foreign investors and money market funds has provided support for T-bill yields. Geopolitical uncertainty has driven foreign investors to hold U.S. Treasury securities, and money market funds have benefited from the positive yield spread between T-bills and overnight bank lending rates. With yields remaining at historically high levels, this robust investor demand is expected to continue, even with increased supply towards year-end.
Investors seeking stability and attractive yields should consider the benefits of shorter duration Treasuries, such as T-bills. These investments provide the opportunity to preserve principal, earn superior yields compared to other asset classes, and mitigate downside risks associated with stock and bond portfolios. The SPDR® Bloomberg 3-12 Month T-Bill ETF (BILS) offers a cost-effective way to gain exposure to the front end of the Treasury curve and benefit from the current market conditions. As we head into a potentially turbulent year-end, investors comfortable with some reinvestment risk should strongly consider BILS as a shelter in these uncertain times.