Cash is no longer garbage.
For the first time in 15 years, investors can earn nearly 4% yields on US Treasury bills, while some money market fund rates have reached 2% and are likely to rise. Those returns were around zero in early 2022.
The rate hike is helping formerly yield-hungry savers, who have suffered from short-term yields below 1% for much of the last decade and a half. Savers could finally see positive inflation-adjusted returns next year. While consumer prices have risen by 8.3% over the past year, the latest monthly figures have been close to zero.
The additional returns from the vast pool of money market funds and other short-term bond investments could also boost the economy. One loser is the US government, which pays more for its loans.
Other beneficiaries of higher short-term interest rates are liquid companies such as
(ticker: BRK/A, BRK/B),
(GOOG, GOOGL) and
Berkshire, for example, was sitting on more than $100 billion in cash and equivalents at the end of June, including about $76 billion in Treasury bills. A risk-averse Berkshire CEO, Warren Buffett, prefers to keep the bulk of Berkshire’s cash in T-bills.
Earnings from Berkshire’s cash holdings are now over $3 billion a year, up from almost nothing in 2021 when T-bill rates were just above zero. Apple had $179 billion in cash and cash equivalents as of June 30, while Microsoft had $105 billion and Alphabet had $125 billion (including marketable securities).
The rise in interest rates on short-dated securities and funds reflects the Federal Reserve’s move this year to raise the federal funds rate from near zero to a current range of 2.25% to 2.5%. A 0.75 percentage point hike is expected at the next Fed policymakers’ meeting next week. Based on the CME FedWatch tool, bond market participants expect the fund rate to be above 4% by the end of the year.
According to Bloomberg, investors can now get an interest rate of 3.18% on three-month T-bills, 3.78% on six-month T-bills and 3.92% on one-year bills. The one-year T-Bill has one of the higher Treasury yields. For example, the 10-year bond yields 3.4%
Individuals can purchase T-Bills from banks and brokerage firms, or directly at regular auctions through the US Treasury Department’s TreasuryDirect program. Three- and six-month notes are sold weekly on Mondays, while one-year notes are auctioned every four weeks.
One of the benefits of T-bills is that the interest is exempt from state and local taxes — a plus in states like New York and California, where top income tax rates exceed 10%. T-bills stack up well compared to bank savings accounts and CDs. According to Bankrate.com, the top-yielding annual CD is around 3% and the average annual rate is around 0.5%
Retail investors can also buy T-Bills through liquid exchange-traded funds like the $23 billion
iShares Short Treasury Bond ETF
(SHV), which holds government bonds with an average maturity of about four months, and the $20 billion
SPDR Bloomberg 1-3 Month T-Bill ETF
The iShares SHV ETF has a 30-day yield of 2.5% based on a Securities and Exchange Commission methodology. The SPDR Bloomberg BIL ETF’s SEC yield is 2%.
Investors who are willing to take on a slightly higher interest rate risk can buy it
iShares 1-3 Year Treasury Bond ETF
(SHY) with an average maturity of around two years and an SEC yield of 3.3%. The $42 billion
Vanguard Short Term Corporate Bond ETF (VCSH)
has an SEC yield of more than 4% and an average maturity of 3 years. The Vanguard Fund holds investment-grade corporate bonds that are rated single-A or triple-B.
“Investors recognize that if the Fed hikes rates, ETF portfolios will turn over and the bonds that are added to the portfolio will generate higher returns,” said Steve Laipply, U.S. head of bond ETFs at
running iShares. This should boost returns from bond ETFs, particularly those with shorter maturities.
Investors have poured money into Treasury ETFs this year to take advantage of the sharp rise in yields. For example, the iShares SHV ETF has raised $10 billion this year, and the iShares SHY ETF has had inflows of about $6 billion, according to iShares.
Money market fund returns are also increasing. The massive $216 billion Vanguard Federal Money Market Fund (VMFXX) now has an SEC yield of 2.15%, and that yield is likely trending higher.
Write to Andrew Bary at firstname.lastname@example.org