Why We Are Getting More Inquiries on Our Ultra Short Duration Strategies

It’s been almost ten years since short duration high quality fixed income earned more than inflation. The last decade has pretty much been a losing battle for the sector, as the Federal Reserve kept short-term interest rates artificially low to aid the U.S. economic recovery. It’s been painful to earn less than inflation for all these years, especially since a certain allocation to cash and high quality short term investment tends to be prudent. 

But thanks to recent rate hikes (an increase of 1.25% over the last 18 months) by the Federal Reserve, three-month treasury bills just recently have begun yielding more than inflation!  The three-month treasury yield of about 1.9% compares favorably to the Core Personal Consumption Expenditure (the Fed’s main measure of inflation) of 1.8% (see the chart below). This means that investors are no longer losing money on a real (inflation adjusted) basis. Quite frankly, it’s hard to find anything safer and shorter term than a three-month treasury!

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In practice it is not hard to do better than 1.9% while maintaining a high level of safety. Just extend the maturity a few months and add a little high quality credit spread exposure on top of the treasury yield and it is possible to earn 2.50%. That is the yield to worst (YTW) on SNW’s Ultra Short Taxable Strategy, which has a duration of ~1.0 year and holds about 50% of its investments in treasuries. Similar opportunities exist to beat inflation in tax-free municipals as well. The YTW on the SNW Ultra Short Tax Exempt Strategy is 1.80%, which is a tax equivalent rate of 2.77%. In comparison, the national average rate for a one-year bank certificate of deposit was 0.58% for the week ending June 11th. As for money market funds, Barron’s reported on June 18th the average 7-day yield on a government money market fund was 1.22%, and the 7-day yield on a tax free fund was 0.84%. 

Ten years is a long time to earn less than inflation! Now savers and fixed income investors can celebrate the return of safe income. It’s a good thing!

Sources: Bloomberg, BankRate.com, Barron’s