Tunnel Vision on T-Bills: What Are Investors Missing?
Treasury bill yields near 5% are getting a lot of attention, but plenty of assets are outperforming that so far this year. Can it continue?
What’s good about 5%: The big story in markets the last few weeks is that investors think policy rates in the United States will stay higher for longer. After a string of strong economic data to start the year, the market thinks short rates will be almost 5.4% by the end of the year, up from 4.5% in January.
As a result, in the week of Feb. 20-24, for the first time in more than 15 years, one-year Treasury bills yielded over 5%.
Earning 5% to lend money to the U.S. government seems tough to beat. However, investors should be mindful of what they might be missing when they keep too much capital in T-bills.
Despite the uncertainties, many different markets, assets and securities have outperformed the 0.59% return that cash has generated so far. Here are just a few examples:
As of Feb. 24, a global 60/40 portfolio is up +3.4% and the MSCI All Country World Equity Index is up +5.2%; 35 of the 48 countries within that universe we track have outperformed cash.
The strong start to the year for fixed income was too good to be true. Investment grade municipal bonds have pared most of their close to 3% rally to start the year after hotter-than-anticipated inflation and employment data forced investors to reassess the path of Federal Reserve policy. Now that investors are expecting policy rates to go higher and stay there longer, investment-grade and high-yield municipal bond indices have dropped by 2.3% and 3.4%, respectively.
The market thinks short rates will be almost 5.4% by the end of the year.
The good news is that we think this sell-off is giving U.S. taxpayers a good opportunity to pick up some yield, especially in shorter-term bonds. In January, yields on short-term municipal bonds were so low that they failed to beat similar T-bills on an after-tax basis. But now, after the sell-off, there are many parts of the market that can.
A 5% yield on T-bills pays investors to wait. But it isn’t the insurmountable hurdle that many are making it out to be. There are plenty of opportunities to get excited about if you know where to look.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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