6-Month Treasury Yield Rises to 5% for First Time Since 2007

(Bloomberg) — Investors have the opportunity to earn more that 5% for some of the best debt securities around the globe, for the first-time in nearly 20 years. It’s comparable with riskier assets like S&P 500 Index.

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There is one small problem: US Treasury bills are less safe because there has not been an act by Congress. The payment could be delayed.

As traders increased expectations of further Federal Reserve interest-rate increases, this week’s six month Treasury bills yielded 5%. One-year bill yields were close to the threshold. The clock is ticking on raising the federal debt limit. Meanwhile, the Congressional Budget Office warned that the government would run out of money as soon as July.

Despite this, returns on six month bills are still a small fraction of the earnings yield on benchmark equity index. It’s a risk that investors seem to be willing to take. Weekly bill auctions continue to attract strong demand.

“Cash has become king,” said Ben Emons, senior portfolio manager at NewEdge Wealth. “At such higher rates these cash-like instruments become a much better risk-management tool in your portfolio than other things. If you put 50% of your portfolio now in bills and the rest in equities then your portfolio is better balanced.”

Emons stated that previous debt-limit battles created opportunities for investors by cheapening bills. Emons predicts that a prolonged political struggle over the debt limit will result in an agreement in time to avoid default.

Six-month bills fit squarely within the window in which Wall Street strategists and the CBO project that the government will run dry if Congress fails to raise the debt limit. Some investors may be avoiding them because they are afraid of the consequences, but others are being paid to take on that risk. The yield rose 16 basis points between the two auctions, marking the highest back-toback increase since October.

The Treasury will auction $60 billion worth of three-month bills next week. It also plans to sell $48 billion worth of six-month bills. There will also be $34 billion in one-year paper.

Treasury Rates Increase on Bills Due at Debt Deadline for Gross Purchases

The longer-term Treasury yields rose this Week, with most of them reaching their highest levels in the year and some exceeding 4 percent. However, bills offer greater protection from an uncertain Fed outlook. Few traders had expected that the central bank would raise rates once again after March, a month ago. By Friday — following a series of indications that inflation isn’t slowing as rapidly as anticipated — an increase in May was fully priced into swap contracts, with odds for another one in June reaching about 70%.

It would be 5.25% to 5% if it were three more quarter-point rate hikes from the 4.5%-4.7% target range established on February 1. This forecast was adopted by economists at Goldman Sachs Group Inc., and Bank of America Corp. in notes published Thursday.

The release of the minutes from the central bank’s February 1 meeting and personal income-and-spend data for January may provide additional clarity regarding the possibility of rates rising.

These may increase the allure of bills by extinguishing any remaining wagers that monetary policy will begin to loosen by year-end — an expectation Fed policy makers have discouraged.

“People are realizing that with what the Fed has said about going higher but staying there for longer is probably going to dictate market returns in 2023,” Deborah Cunningham is the chief investment officer for global liquidity markets and the senior portfolio manager at Federated Hermes. “You can’t bet that the Fed is going to get to a terminal rate and then start going back down and be back at 4.5% by the end of the year. That’s just not what the market should be thinking.”

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