Time to Chill on Tbills?
January 04, 2024
Read Time 4 MIN
2023 was quite a year for advisors. I've been in discussions with my clients about the massive shift we've witnessed — over $1 trillion has poured into money markets, short-term Treasuries, and related funds. Now, balances across short-term cash and equivalents in the U.S. have surpassed an astounding $10 trillion. To put this into perspective, that's more than the GDP of over 190 countries.
Many of my clients are quick to point out the appeal of these investments. After all, the last time yields were this attractive was over two decades ago, and when you factor in the economic and geopolitical uncertainties, not to mention the unusual bond market volatility, it's clear why there's been a rush towards these high-quality, short-duration assets.
In my recent conversations about interest rates, I've shared with my clients that, despite growing market calls for a reversal in rates early in 2024, we continue to maintain that short rates will stay elevated into 2024. But that doesn’t mean investors should “Tbill and chill” forever. Looking ahead, we believe it is prudent to start exploring opportunities beyond short-term treasuries, money markets, and cash equivalents. From what we've seen, diversifying into other areas of fixed income near or at the end of a Fed tightening cycle has often resulted in better outcomes for investors.
I often explain to my clients that treasury securities, which carry zero credit risk, offer a straightforward investment: the coupon you receive is likely to mirror your annualized total return for the chosen maturity. But when it comes to corporate credit, there's an added layer of risk and, consequently, a higher yield to compensate for that risk. Bond prices and yields move inversely, and given the sharp rate increases, bond prices have been trading lower. This represents an opportunity for the price component of total return to work in our favor, as bonds are 'pulled to par' at maturity.
Bonds Are Well-positioned to Benefit from Higher Yields
Source: Bloomberg. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
The starting yields in fixed income are currently high, which allows for the absorption of potential interest rate hikes without principal loss. If rates fall, there's a dual benefit: the pull to par and a positive effect from duration, contributing to total return.
At VanEck, we’re trained to be discerning students of history. History doesn’t always repeat, but when it comes to patterns in the market, it certainly rhymes. Using history as a guide, looking back at the last four hiking cycles, we can see that the average returns across various areas of core fixed income outperformed US Treasury Bills in the 12 and 24 months following the end of a tightening cycle.
Learning from History: Fixed Income Performance Post-Hiking Cycles
Following 12 month returns
Following 24 month returns
Source: Bloomberg. US TBills: ICE BofA US Treasury Bill Index; US IG Corps: Bloomberg US Corporate Index; Muni Bonds: Bloomberg Municipal Index; US HY Corps: ICE BofA High Yield Index; US MBS: Bloomberg Agency Mortgage Backed Securities Index. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Spotlight on Quality: BBB and BB Rated Bonds
Looking forward, if we're to benefit from potential declines in interest rates, it's important to weigh the risk/reward of extending duration with credit. I've been advising my clients that while corporate credit stands fairly strong — with high interest coverage, low leverage ratios, and support from low issuance — after a period of high-interest rates, stress indicators tend to surface. 'Maturity walls' pose refinancing risks, and corporate credit can be subject to downgrade risks when economic conditions weaken.
This is why, for 2024, I'm advocating for a focus on higher quality credit. We've looked at BBB and BB rated bonds as a 'sweet spot' for both relative value and quality. BB rated bonds, in particular, have historically offered the highest Sharpe ratio of all rating categories, benefiting from both discounted bonds moving into high yield and premium bonds returning to investment grade.
For exposure to these market segments, I've been discussing options like the VanEck Moody's Analytics BBB Corporate Bond ETF (MBBB) and the VanEck Fallen Angel High Yield Bond ETF (ANGL). MBBB offers exposure to BBB-rated corporate bonds with attractive valuations and a lower probability of being downgraded to high yield compared to other BBB-rated bonds. ANGL provides access to high yield bonds that were originally issued as investment grade bonds. Fallen angel bonds have historically had higher average credit quality than the broad high yield bond universe.1
For those interested in the municipal bond market, the VanEck Municipal Bond ETF Suite offers a range of choices. The VanEck Intermediate Muni ETF (ITM) is a solid pick for core investment-grade exposure with near benchmark-neutral duration risk. Meanwhile, for those looking to extend duration further in anticipation of long rates coming down, the VanEck Long Muni ETF (MLN) could be a compelling option.
To receive more Economic Trends insights, sign up in our subscription center.
Follow Us
Related Topics
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
DISCLOSURES
1 Fallen angel bonds represented by ICE US Fallen Angel High Yield 10% Constrained Index and broad high yield represented by ICE BofA US High Yield Index.
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued and settled in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities. ICE BofA US Treasury Bill Index tracks the performance of US Treasury bills. Bloomberg US Corporate Index tracks the investment grade, fixed rate, taxable corporate bond market. Bloomberg Municipal Index tracks the USD-denominated long-term tax-exempt bond market. ICE BofA High Yield Index tracks the performance of below investment grade rated corporate debt publicly issued in the U.S. domestic market. Bloomberg Agency Mortgage Backed Securities Index tracks agency mortgage backed pass-through securities.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The principal risks of investing in VanEck ETFs include sector, market, economic, political, foreign currency, world event, index tracking, active management, social media analytics, derivatives, blockchain, commodities and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks. There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider the investment objective, risks, and charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information about the investment company. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
DISCLOSURES
1 Fallen angel bonds represented by ICE US Fallen Angel High Yield 10% Constrained Index and broad high yield represented by ICE BofA US High Yield Index.
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued and settled in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities. ICE BofA US Treasury Bill Index tracks the performance of US Treasury bills. Bloomberg US Corporate Index tracks the investment grade, fixed rate, taxable corporate bond market. Bloomberg Municipal Index tracks the USD-denominated long-term tax-exempt bond market. ICE BofA High Yield Index tracks the performance of below investment grade rated corporate debt publicly issued in the U.S. domestic market. Bloomberg Agency Mortgage Backed Securities Index tracks agency mortgage backed pass-through securities.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The principal risks of investing in VanEck ETFs include sector, market, economic, political, foreign currency, world event, index tracking, active management, social media analytics, derivatives, blockchain, commodities and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks. There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider the investment objective, risks, and charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information about the investment company. Please read the prospectus and summary prospectus carefully before investing.
©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.