Federal Reserve (Fed) officials believe that further hikes are likely necessary to reach the 2% inflation target. With higher rates creating attractive yield opportunities at the short end of the curve, short-duration government bond funds are seeing inflows surge.
This article was written with contributions from Maciej Rabiniak. Maciej is a Research Analyst on the SPDR Americas Research Team.
Last week, US equities swung between gains and losses as recent positive economic momentum supported the soft landing narrative, but upside surprises in inflation and payrolls led to more hawkish Fed rhetoric. Treasury yields have been rising on both the long and short end of the curve. Higher inflation expectations raised 10-year yields and hawkish Fed rhetoric lifted short-term yields.
Despite inflation accelerating to start the year, Tuesday's US consumer confidence data ticked up to 108.5, up 1.5 points after an unexpected drop in January. The increase offered a glimpse into households' slightly improved views on economic prospects and inflation expectations. Upcoming earnings results from high-profile retailers — Target, Macy’s, Lowe’s, Best Buy, Costco, and Dollar Tree — will also shed light on the strength of consumer spending and inflation’s impact on company bottom lines.
In the meeting minutes from February’s Federal Open Market Committee (FOMC) meeting, Fed officials noted that they anticipate more rate hikes will be necessary to bring inflation down to the Fed’s 2% target. Market implied peak rates for this year have moved up to 5.36% from 5.1% in December.1
Higher rates have led to attractive defensive yield opportunities between the three-month and 12-month tenor of the Treasury curve, since they have generated the highest yields across all maturity bands while carrying minimal duration risks.
Treasury Yield Curve Attractive at the Short End
Hotter-than-expected Personal Consumption Expenditures (PCE) inflation data has unnerved both equity and credit markets. Investors looking to preserve their dry powder while waiting to re-enter the market can consider the SPDR® Bloomberg 3-12 Month T-Bill ETF (BILS). BILS’s benchmark, the Bloomberg 3-12 Month T-Bill Index, has a yield-to-worst comparable to 1-3 year Treasury yields with just a fifth of its duration.2
Decade-high Treasury yields continue to attract strong inflows into government bond ETFs. This is particularly true in the short-term space, which has seen $8.5 billion of inflows already this year.3 Providing higher yields and shorter duration, BILS may be an attractive alternative to other short-term Treasury ETFs that target one- to three-year Treasurys.4 Investor interest in BILS has been strong, with the fund seeing 49% AUM growth year to date to close in on the $1 billion mark.5
BILS may help investors capture generationally elevated income while seeking to preserve capital amid the current economic and monetary policy uncertainty.
BILS Standard Performance as of December 31, 2022
1 Bloomberg Finance L.P., as of February 23, 2023.
2 Bloomberg Finance L.P., as of February 24, 2023.
3 Bloomberg Finance L.P., as of February 23, 2023.
4 Bloomberg Finance L.P., as of February 23, 2023.
5 Bloomberg Finance L.P., as of February 23, 2023.
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