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Why ETF Investors Want 0% T-Bills

Cinthia Murphy

The latest U.S. Treasury auction this week made headlines: Three-month Treasury bonds sold at 0 percent yield for the first time.

If the income associated with these securities is basically nonexistent—and in inflation-adjusted terms it’s negative—demand for them nonetheless remains strong because investors aren’t necessarily owning these T-bills for income.

These securities—many of which will likely land in various short-dated bond and money-marketlike ETFs—appeal to investors for other reasons, such as safety.

‘Safe Place To Park Cash’

“On its surface, a 0 percent yield for a T-bill doesn’t seem that attractive,” said Matt Tucker, head of fixed income for iShares. “Investors buy bonds for different reasons. Among ETF investors, there are some who value safety over yield.”

T-bills to these investors are a “safe place to park cash,” or a good way to “put money to work,” Tucker says. In the institutional space, many large investors have mandates to keep their cash invested in the market at all times—yield or no yield.

“For them, 0 percent isn’t that attractive either, but they have a need to purchase securities, and the T-bill auction is a way to get a block of paper at once,” Tucker said. “For example, an institution that is running an asset allocation portfolio may have most of its money in risky assets like stocks, and a portion in T-bills to lower its overall portfolio risk.

“For that investor, the yield on the T-bill isn’t that important,” he added, noting that in these models, returns are coming from stocks instead. T-bills play a defensive role.

ETFs That Hold 0% Bonds

In the ETF space, there are several strategies that might find no-yielding T-bills among their holdings. For instance, funds navigating that line between money-market and short-term bond strategies such as the $1.7 billion iShares Short Maturity Bond ETF (NEAR | A) and the $4.2 billion Pimco Enhanced Short Maturity Active Exchange-Traded Fund (MINT), where 93 percent of the portfolio is allocated to 0- to 1-year bonds.

Chart courtesy of StockCharts.com

But even in these cases, the role of a three-month T-bill is one more akin to cash than to that of an income-generating security, according to Paul Britt, ETF analyst at FactSet. These bonds can also fulfill other roles in an ETF portfolio. They can be used in:

  • small amounts where a portfolio manager isn't fully invested because they’re moving in or out of a position
  • large amounts as a defensive step
  • large amounts as collateral for futures forwards swaps, etc.
  • any amount as an allocation for some fixed-income funds

In relative terms, U.S. investors faced with a zero-yielding, three-month T-bills are still in better shape than other bond investors.

“In Switzerland, short-term government bond rates are at negative 75 basis points, and even a 10-year security yields negative 23 basis points,” Tucker said.

Contact Cinthia Murphy at cmurphy@etf.com.

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