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|
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 ssga.com 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.
1 ICI, as of March 31, 2020.
The commentary does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Non-diversified funds that focus on a relatively small number of securities tend to be more volatile than diversified funds and the market as a whole.
Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The Fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments.
Actively managed funds do not seek to replicate the performance of a specified index. An actively managed fund may underperform its benchmark. An investment in the fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Investments in asset backed and mortgage backed securities are subject to prepayment risk which can limit the potential for gain during a declining interest rate environment and increases the potential for loss in a rising interest rate environment.