Battered investors now find thrills in T-bills

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Summary

  • Faltering markets flatter positive returns in the short-term vehicles. ‘You don’t really have too many other great options.’

James DiCio spent much of the last eight years riding cryptocurrencies’ double-digit gains and losses. Lately, the 24-year-old has found a new hot investment: short-term government debt.

Weary of big swings in digital currencies, the pilot from Bohemia, N.Y., sold most of his crypto holdings last year, shifting his money from one of the most volatile investments to one of the safest. Now about 20% of his portfolio is in four-week to 13-week Treasury bills, these days yielding as much as 3.3%, the most since he was 9.

“I’m here, I’ve made this much money, and now I kind of want to protect it," Mr. DiCio said. “In this economy, you don’t really have too many other great options."

His shift mirrors the one taking place across financial markets. The Federal Reserve’s rate increases have spurred investors’ fears of a recession, driving stocks to their worst first three quarters since 2002 and sparking a crypto rout.

Meanwhile, the yield on two-year Treasurys, which often rises when investors expect higher rates, has rapidly climbed to more than 4% for the first time since October 2007. Investment managers say their clients are feeling cautious, if not yet panicked, about the broader market.

Few see much light ahead. Many expect October to kick off with a downbeat batch of corporate updates. Analysts now think S&P 500 earnings grew by about 3% year over year in the third quarter, down from a 10% forecast at the end of June, per FactSet. Investors will also spend the last months of 2022 scouring data for signs of the recession many fear is inevitable.

That could spell more pain for stocks and longer-term bonds, lifting the appeal of low-risk, short-term Treasurys.

Rising rates carried the yield on two-year Treasurys to 4.206% on Friday, up from 2.925% when the quarter began. That caps the two-year yield’s largest gain through a year’s first nine months since 1981. The 10-year Treasury yield has climbed at a slower rate, finishing Friday at 3.802% compared with 2.973% at the end of June.

The result has been a flood of money into long-ignored short-term government debt. In recent years, T-bills—debt that matures in a year or less—often yielded effectively nothing, mostly useful for greasing the gears of financial markets as a close substitute for cash. Instead of receiving regular interest payments, investors buy T-bills at a discount and get the full face amount at maturity.

Over the past month, funds that invest in this debt and short-term notes have added an average of $4.4 billion a week, according to Refinitiv Lipper. Apart from the early pandemic market crash, that is the fastest clip on record in data going back to 1993.

Investors have also crowded into auctions for newly issued short-term Treasurys. In each of the Treasury Department’s two-year debt sales since March, individuals have snapped up more than $600 million in notes. Before this year, individual accounts hadn’t claimed that much in an auction in more than a decade.

That reversal has come after a long stretch when returns on short-term Treasurys largely disappeared. Bond yields, which rise when bond prices fall, dropped rapidly in 2007 at the start of the global financial crisis and remained near zero for much of the next 15 years, a stretch of tame inflation and slow economic growth. Two-year yields ticked higher in the mid-2010s as the Fed began raising rates, but peaked below 3% and declined again when the central bank reversed course in 2019.

That long run of negligible returns made it easy for individual investors to ignore the Treasury market, said James Kruzan, founder of Michigan-based Kaydan Wealth Management.

In recent months, higher yields on government debt have been prompting more phone calls.

Mr. Kruzan recently helped a client shift $200,000 from a bank’s money-market fund into two-year Treasurys. “Now they have the ability to at least lock into north of 3%," he said. “It’s been a long time since clients have gotten competitive rates on cash and cash equivalents."

Even accounting for inflation, the appeal of short-term Treasurys has improved.

A year ago, one-year Treasury bills offered a yield of about 0.08% at a time when investors were forecasting inflation of just above 3% over roughly the coming year. (At 8.3% for 12 months through August, inflation actually turned out to be much higher than that.) That meant that someone buying a one-year T-bill last September expected a real return of about minus 3% when the bill matured, after accounting for rising prices.

Now, one-year Treasurys are yielding 4%, while traders are predicting prices will rise by around 2.3% over the next 12 months or so—a 1.7% positive return after expected inflation.

Higher nominal yields have also made short-term Treasurys more attractive than other ultrasafe places to park cash. The typical U.S. savings account offered less than a percentage point of interest in September.

Two-year certificates of deposit—which lock up savers’ funds for 24 months in exchange for higher interest—do a little better, but still don’t match Treasurys. More generous CDs are now paying about 3.5%, according to Bankrate.com.

Most investors consider Treasurys ultrasafe because they believe it is practically impossible for the federal government to miss a bond payment. That sets them apart from bonds sold by companies and local governments, which occasionally default under financial strain.

But Treasurys come with other risks. If the Fed raises interest rates more than traders now expect, their prices could fall further.

Price declines have walloped government-debt investors this year. An ICE index that tracks returns on Treasurys with maturities of two years or less has lost 1.3% in 2022, despite rising interest payments.

Still, many investors are now happy to lock in some of the highest government-debt yields in recent memory, said Tom Wilson, head of wealth advisory at Brinker Capital Investments, which provides investment portfolios to financial advisers.

“When the fed-funds rate was 0 to 25 basis points, the only way to get interesting returns net of fees was to take on more risk," Mr. Wilson said. “Now, those opportunities are getting more interesting."

 

This story has been published from a wire agency feed without modifications to the text

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