Is It Time for 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%.

Related: Central Banks Are Draining the Pool!

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,, Barron’s