Money is no longer trash.
For the first time in 15 years, investors could get nearly 4% yield on US Treasuries, while yields on some money market funds hit 2% and are likely headed higher. Those yields were around zero at the start of 2022.
The rate hike helps savers who previously suffered from earnings that have suffered for most of the past decade and a half with short-term yields below 1%. Savers may finally see a positive inflation-adjusted return next year. While consumer prices rose 8.3% over the past year, the most recent monthly reading was close to zero.
Added income from the huge pool of money market funds and other short-term bond assets could also provide a boost to the economy. One loser is the US government, which is paying more on its loans.
Other beneficiaries of higher short interest are cash-rich companies such as Berkshire Hathaway (ticker BRK/A, BRK/B),
(GOOG, GOOGL) and
Berkshire, for example, had more than $100 billion in cash and cash equivalents, including about $76 billion in Treasury bills, at the end of June. Berkshire CEO Warren Buffett, a risk-taker, prefers to keep most of Berkshire’s cash in Treasuries.
Berkshire’s cash income is now running at more than $3 billion a year, compared to almost nothing in 2021, when Treasury yields were hovering just above zero. Apple had $179 billion in cash and cash equivalents as of June 30, while Microsoft had $105 billion and Alphabet $125 billion (including marketable securities).
The rise in short-term bond and funds rates reflects the Federal Reserve’s move this year to raise the key fed funds rate to the current range of 2.25 percent to 2.5 percent from near zero. A 0.75 percentage point hike is expected at the Fed’s next policy meeting next week. Based on the CME FedWatch tool, bond market participants expect the funds rate to exceed 4% by the end of the year.
Investors can now get interest of 3.18% on the three-month Treasury bill, 3.78% on the six-month Treasury bill and 3.92% on the one-year bill, according to Bloomberg. One-year Treasury bills have one of the highest yields of government bonds. The 10-year bond, for example, yields 3.4%
Individuals can buy Treasury bills from banks and brokerage firms or directly at regular auctions through the US Treasury Department’s TreasuryDirect program. Three- and six-month bills are auctioned every week on Mondays, while one-year bills are auctioned every four weeks.
One of the advantages of Treasury bills is that the interest is exempt from state and local taxes—a plus in states like New York and California, where the top income tax rates exceed 10%. Treasury bills stack up well against bank savings accounts and CDs. The highest-yielding one-year CD is about 3%, and the average one-year rate is about 0.5%, according to Bankrate.com
Individual investors can also buy Treasuries through liquid exchange-traded funds such as $23 billion
iShares Short Treasury Bond ETF
(SHV), which holds government bonds with an average maturity of about four months and $20 billion
SPDR Bloomberg 1-3 Month T-Bill ETF
The iShares SHV ETF has a 30-day yield of 2.5% based on the Securities and Exchange Commission’s methodology. The SPDR Bloomberg BIL ETF’s SEC yield is 2%.
Investors willing to take on a little more interest rate risk can buy
iShares 1-3 Year Treasury Bond ETF
(SHY) with an average maturity of about two years and an SEC yield of 3.3%. 42 billion dollars
Vanguard Short-Term Corporate Bond ETF (VCSH) carries an SEC yield of more than 4% and an average maturity of 3
years. The Vanguard fund owns investment-grade corporations, the majority of which have a single-A or triple-B rating.
“Investors realize that when the Federal Reserve raises interest rates, the ETF portfolios will turn around and the bonds going into the portfolio will have higher yields,” said Steve Lapley, US head of bond ETFs at
which manages iShares. This should boost yields for bond ETFs, especially those with shorter maturities.
Investors poured money into Treasury ETFs this year to take advantage of the sharp rise in yields. The iShares SHV ETF, for example, has taken in $10 billion this year, and the iShares SHY ETF has had inflows of about $6 billion, according to iShares.
Yields on money market funds are also rising. The huge, $216 billion Vanguard Federal Money Market Fund ( VMFXX ) now has an SEC yield of 2.15%, and that yield is likely headed higher.
Write to Andrew Barry at [email protected]