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Optimizing Intermediate Cash Investments in a Low-Yield Environment

  • Ultra-short term bond strategies can help to supplement cash positions and increase yield
  • The SPDR SSGA Ultra Short Term Bond Fund ETF (ULST) may be an attractive option for investors with intermediate liquidity needs

In early March, investors began grappling with the effects of the global COVID-19 pandemic and the ensuing economic shutdown, setting off a steep decline that pushed equities into free-fall and essentially froze the fixed income market altogether—historic moves not witnessed even during the most difficult days of the 2008 global financial crisis.

Throughout the month of March, market participants identified short-term, high-quality fixed income securities as a potential place to park assets. The SPDR® Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) experienced nearly $10 billion of inflows, representing greater than 100% growth in AUM in just one month. Money market mutual funds also saw remarkable inflows, gathering $762 billion during March and growing by $1.1 trillion versus the start of 2020. 1

Despite mounting job losses, plummeting corporate profits and disastrous economic data, miraculously, markets have rallied sharply since hitting their lows on March 23. Massive fiscal and monetary policy responses have aided the unexpected rebound in risk assets and short-term market sentiment has been bolstered by the reopening of the global economy, optimism regarding potential health solutions to COVID-19 and a firm commitment from policymakers to do whatever it takes.

Although markets have rebounded, many investors are still feeling cautious, as evidenced by the large wall of cash effectively earning a 0% interest rate.

What is cash?
It’s important to clarify the definition of “cash.” Cash includes strategies that are not typiclaly impacted by volatility in risk assets. Ultra-short term bond strategies, such as the SPDR SSGA Ultra Short Term Bond Fund ETF (ULST), can help to supplement cash positions and can be used to potentially increase the yield of a cash allocation. Such strategies should be considered an intermediate holding that can be invested for up to 6 to 12 months.

Earning above-zero yield
For cash investors, the current challenge is the Federal Reserve’s interest rate policy and its impact on yields. After the Fed dropped its target rate to between 0.00% and 0.25%, the futures market indicated that no move is expected from this rate for two years, as shown below. As a result, certain short-term Treasury ETFs and money market funds are yielding close to zero.

Source: Bloomberg, as of June 9, 2020.

Investors must now determine the best path to earning above-zero yields on cash. Our research shows that, compared to BIL, ULST has offered almost 2.00% of additional yield, as shown below. Since 2016, this yield advantage has averaged approximately 0.50%. Over time, investors should expect that the yield differential is likely to revert to its historical average as credit spreads benefit from the Fed’s various liquidity programs and credit conditions continue to improve.

Source: State Street Global Advisors, as of June 2, 2020.

Careful consideration should be given when choosing an ultra-short strategy. ULST uses a multi-asset, highly diversified approach to purchase credits to provide an optimal risk-return profile. Over time, this strategy can prove effective in mitigating interest rate risk and may provide greater income compared to a cash holding.

Standardized Performance as of 6/30/20.

  1 Month QTD YTD 1 Year 3 Year 5 Year 10 Year Since Inception Inception Date
ULST (NAV) 0.72% 3.24% 0.53% 1.86% 2.08% 1.69% - 1.35% 10/9/2013
ULST (MKT) 0.92% 3.70% 0.63% 2.02% 2.11% 1.72% - 1.38% 10/9/2013
BIL (NAV) 0.00% -1.00% 0.41% 1.32% 1.53% 0.98% 0.46% 0.69% 5/25/2007
BIL (MKT) 0.00% -0.03% 0.40% 1.31% 1.54% 0.98% 0.45% 0.69% 5/25/2007

Source: State Street Global Advisors, as of June 30, 2020.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. For SPDR ETFs, visit for most recent month-end performance. For other fund families, please visit their respective websites. Returns greater than one year are annualized. The market price used to calculate the Market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. If you trade your shares at another time, your return may differ.