BIL ETF: Take 5% Plus And Rest Easy

If there is one thing we learned from the most recent Federal Reserve meeting, it is that everything possible will be done to get inflation back to the Board’s target level. This “higher for longer” strategy likely means that we won’t see any interest rate cuts coming this year, and it’s possible that none will come in 2024 either if the US economy remains fairly strong. As a result, one place investors should look at today is short-term treasuries, where you can earn some nice income while not worrying should rates rise further.

For those looking at bond ETFs, the SPDR Bloomberg 1-3 Month T-Bill ETF (NYSEARCA:BIL) is a potential opportunity. As the name suggests, the fund looks to invest in very short-dated Treasuries, and it pays out distributions on a monthly basis. With short-term rates rising sharply in the past year or so, that means that investors have gotten a lot more monthly income as seen below.

The most recent distribution here for the BIL was a little over 39.4 cents, which, if annualized, would give you a payout of about $4.73. Based on Tuesday’s close at $91.46, that would give you an annual yield of more than 5.17%. According to Finviz data, that yield gives investors more every twelve months than all but 39 of the current S&P 500 Index components. You also don’t have the potential downside of equities should markets continue to panic with rates rising to new multi-year highs recently.

On Tuesday, US equity markets tumbled after bond yields rose again. This time, the culprit was a strong JOLTS report, which measures the number of job openings in the US. Last December, there were more than 11.2 million positions available, but that number was just about 8.8 million in the initial July report (which has since been revised higher). There were hopes that openings would continue to decline, but the number actually jumped higher to more than 9.6 million in August. The Fed will not like this result, because it means the labor market is very strong and that higher wages will be needed to satisfy workers, so labor inflation could remain high.

The Fed continues to work to get inflation down, but this is not a process that can be done overnight. As the chart below shows, Core PCE inflation has come down nicely but still remains well above the Fed’s 2% target. This could easily mean another interest rate hike is on the table for 2023, but at a minimum, it likely means rate cuts won’t happen early next year as some are hoping for.

With interest rates on the rise, the US government is also running up some incredible deficits. Last month, the country’s debt passed $33 trillion for the first time, which isn’t a good thing when rates are no longer at zero. With the US having to eventually spend more than a trillion dollars just to pay interest on this debt pile, it will likely have to borrow even more. Continued heavy supply of Treasuries coming to market could push interest rates even higher in the next couple of quarters.

The main reason why I prefer shorter-term bonds here is the price risk that longer-term bonds have. As all investors know, when bond yields go up, prices go down. While it might be nice to lock in a 4% or so rate for a long time period, it’s not a good investment if we lose on the price side. Take a look at the iShares 20+ Year Treasury Bond ETF (TLT), for instance. While investors have gotten their monthly distributions recently of around 28 cents, the ETF has gone from $102 to $85 in the last three months.

Because it is based on short-term bonds, the BIL ETF moves quickly to changes in rates. Should we see these rates rise towards 6%, the monthly distributions will change mostly in line with these rates. ETFs that only own longer-term bonds aren’t catching up as quickly due to some of their holdings being lower coupon securities. The TLT ETF is only yielding around 3.95% currently, which is roughly a full percentage point lower than where the 20 or 30-Year Treasury bonds are at the moment.

In the end, I’m recommending that investors searching for income take a look at short-term treasury bond ETFs today. The SPDR Bloomberg 1-3 Month T-Bill ETF offers investors a more than 5% yield currently, and it doesn’t have the price risk that you’ll get with longer-duration securities. With inflation not going away quickly and the Fed likely to keep rates higher for longer, equity markets are not doing well at the moment. For at least the next quarter or two, the BIL ETF seems like a good place to park your money and earn some nice interest while we see how things are setup for 2024.