Yield-Hungry Investors Are Feasting on T-Bills

Now, people are buying record amounts of T-bills, both at regular Treasury auctions and through exchange-traded funds. Individual investor demand surged to $13.4 billion in April, based on noncompetitive bids, a good proxy for individual investor demand, up from $1.6 billion in January 2022. The

SPDR Bloomberg 1-3 Month T-Bill
ETF (ticker: BIL) has $30 billion in assets, double its January 2022 total, while the

iShares 0-3 Month Treasury Bond
ETF (SGOV) has nearly doubled, to $10 billion, in the past six months, Morningstar reports. “Amid rising rates, fixed-income securities are back in vogue, and arguably none with as much vengeance as the historically sleepy T-bill,” writes Chris Larkin at Morgan Stanley’s E*Trade division.

Not long ago, investors had to buy junk bonds or emerging market debt to get 5%. Even now, T-bill yields are comparable to those on riskier bonds such as high-grade corporates, which yield 4.5%, and mortgage securities, which offer 5.5%. “You’re now able to earn a really healthy yield without taking on interest-rate risk,” says Dhruv Nagrath, a director of fixed-income strategy at BlackRock. “It has reset the landscape in fixed income.”

T-bills are an alternative to bank accounts paying low rates, and unlike certificates of deposit and corporate bonds, their interest is exempt from state and local taxes. They’re also competition for stocks.

“U.S. T-bills are the safest and easiest alternative to money markets and low-rate bank deposits,” says David Feinman, a private investor and former high-yield bond trader. “The three- to six-month maturities now are the most attractive to me, optimizing yield with reasonable liquidity.”

The Treasury auctions four-week, eight-week, 13-week, 17-week and 26-week T-bills each week and 52-week bills every four weeks. Individuals can buy bills through the TreasuryDirect.gov website, with a $100 minimum, or via regular auctions through brokerage firms such as Fidelity and E*Trade, usually without paying a fee. Treasury bills are sold at a discount from face value, with investors paid face value of $100 at maturity. The difference is the interest payment. For example, a 17-week bill was sold last week at $98.26 with investors getting $1.74 at maturity as interest. Conventional bonds typically sell at face value and make cash interest payments.

Many investors reinvest the proceeds of maturing T-bills in newly auctioned ones, a process known as rolling. It’s best to hold a T-bill until maturity; a sale prior to the redemption date can be costly, due to fees charged by securities brokers.

Treasury-bill ETFs simplify ownership and offer easy liquidity and monthly income. Bid-ask spreads are tight—usually just a penny. The SPDR Bloomberg 1-3 Month and iShares 0-3 Month ETFs have average maturities of just over a month, and the

iShares Short Treasury Bond
ETF (SHV), about three months. All three sport yields above 4.5%.

While bills are about as risk-free as a security can get, they carry “reinvestment” risk—the next bill you buy might yield less than the one you own. Right now, T-bills yield more than the two-year Treasury note, at 4.5%, and the 10-year, at 3.8%. But if the Fed starts cutting interest rates, bill yields could fall below 4% in a year. That would still be ample; it’s unlikely that short rates will head back toward zero, where they stood for most of the past 15 years.

The debt-ceiling crisis also has created a risk—the chance of a default on Treasury debt if a deal isn’t reached by early June. A 21-day T-bill was sold last week at a yield of more than 6%, reflecting that concern. But the situation is likely to be resolved, and even if it takes longer than expected, bill holders would probably be made whole, just as they were when Uncle Sam delayed some payments in 1979 (in part because of a debt-ceiling debate).

When the ceiling is raised, there could be a deluge of T-bill issuance over two months—perhaps up to $700 billion, notes Goldman Sachs—as Washington rebuilds its depleted cash balances. That should mean lots of opportunities to buy bills at high yields.

For investors, savers, and retirees, the good news is that cash is no longer trash—and it’s likely to stay that way.

Write to ANDREW BARY at [email protected]