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The Appeal Of Shorter-Term U.S. Treasuries

Jeffrey Rosenberg profile picture
Jeffrey Rosenberg

The backup in yields has opened up opportunities for fixed-income investors to add exposure to shorter maturity U.S. Treasuries. Jeff explains.

A rapid rise in short-term yields in U.S. government debt is restoring their appeal. This marks a major shift away from the post-crisis era of near-zero yields on such instruments. The upshot: Investors now have a viable alternative to cash with yields finally above inflation levels.

The steady increase in shorter-maturity bond yields provides a thicker cushion against concerns around further rises in interest rates. The light green line in the chart above shows interest rates would need to jump more than one percentage point to wipe out a year of income in the two-year Treasury note. This is nearly double the cushion on offer two years ago - and far larger than the thin insulation provided by longer-term bonds today. We believe the short end offers relatively compelling income, along with a healthy buffer against the prospects of further increases in yields.

The fruits of normalization

The rise in short-term U.S. rates reflects multiple market crosscurrents. The U.S. Treasury market is catching up with the Federal Reserve's (Fed's) own projection of rate hikes in 2018. This reassessment is largely driven by stronger growth expectations tied to fiscal stimulus. Fed Chair Jerome Powell's upbeat appraisal of the economy has reinforced expectations for three to four rate hikes this year.

But two important aspects are influencing rates at the short end of the curve. First, the tax overhaul and budget agreement are spurring a sharp uptick in U.S. Treasury issuance, particularly in one-month to one-year bills. We estimate net bill issuance to hit $500 billion this year, far beyond that seen in recent years. This comes as the Fed is winding down its bond holdings.

Second, U.S. companies repatriating cash following the

This article was written by

Jeffrey Rosenberg profile picture
Jeffrey Rosenberg, CFA, Managing Director, is BlackRock's Chief Fixed Income Strategist and a member of the BlackRock Investment Institute. His responsibilities include working closely with the Global Chief Investment Officer of Fixed Income and the global fixed income portfolio teams to develop BlackRock's strategic and tactical views on sector allocation within fixed income, currencies and commodities. Mr. Rosenberg is also the portfolio manager for the fixed income tactical allocation managed model portfolio, an actively managed portfolio of exchange traded funds. Prior to joining BlackRock, Mr. Rosenberg spent nearly 10 years at Bank of America Merrill Lynch as the Chief Credit Strategist. His most recent role included coordination of strategy across all fixed income, securitized assets, credit, FX and commodities. Mr. Rosenberg brought innovation to his credit strategy work producing the first commercialized quantitative corporate credit portfolio risk analytics system from a dealer firm. At BAML, Mr. Rosenberg and his team were consistently top ranked by Institutional Investor for high grade, high yield, and general fixed income strategy. At BlackRock, Mr. Rosenberg publishes his monthly "Fixed Income Strategy" along with regular posts to the BlackRock Blog, contributions to BlackRock Investment Institute publications and numerous media appearances. Mr. Rosenberg earned a Masters in Science degree in Computational Finance from Carnegie Mellon, a BA degree in Mathematics from the University of Minnesota, and a BA degree in Finance from the University of Wisconsin. He has been a Chartered Financial Analyst since 1997.

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Comments (1)

Meh, party line stuff, this.
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