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Macroscope
Opinion
Nicholas Spiro
Nicholas Spiro

Macroscope | Why investors are turning to 3-month Treasury bills and other cash assets over the hunt for yield

  • Nicholas Spiro says having suffered heavy losses in emerging markets, global equities and US corporate bonds, investors are turning to money market instruments

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A man enters the US Treasury Department building on Pennsylvania Avenue in Washington in January 2017. The 3-month Treasury yield is higher than the average 12-month dividend yield on the S&P 500 equity index for the first time in a decade. Photo: AFP
Nicholas Spiro
One of the big trends in financial markets since the 2008 financial crisis has been the “reach for yield” by income-starved investors. Years of aggressive quantitative easing by the world’s leading central banks caused yields on benchmark government bonds to fall to pitifully low levels. By August 2016, the pool of sovereign and corporate debt trading with a yield below zero had reached almost US$13.5 trillion, amounting to nearly a third of the global stock of bonds, according to data from Fitch Ratings, a credit-rating agency.

The fierce compression in yields forced investors to move higher up the risk curve to generate decent returns. Last year, emerging markets, junk bonds, equities and ultra-long-dated government debt were among the main beneficiaries of the hunt for yield.

Yet, since the beginning of this year, the appeal of risk assets has diminished significantly. In February, a surge in volatility in US stocks put an end to a long period of calm in markets, causing the lofty valuations of American shares to come under scrutiny. The turbulence erupted just as global growth was becoming less synchronised and facing mounting threats, stemming mainly from the escalation in trade tensions. A brutal sell-off in developing economies, triggered by a rally in the US dollar, dented investors’ risk appetite further.
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Another important reason why the scramble for yield has dwindled is this year’s dramatic change in the fixed income landscape. For the first time since the financial crisis, the yield on 3-month US Treasury bills – risk-free and ultra-liquid securities that are the markets’ closest proxy for hard cash – has risen above most of the main gauges of inflation. Since the start of this year, the yield has shot up 100 basis points to just below 2.4 per cent, its highest level since January 2008 and above America’s core inflation rate and the Federal Reserve’s own preferred measure of inflation.

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Shoppers make their way through a mall in Scranton, Pennsylvania, on November 23. For the first time since the financial crisis, the yield on 3-month US Treasury bills has risen above most of the main gauges of inflation. Photo: AP
Shoppers make their way through a mall in Scranton, Pennsylvania, on November 23. For the first time since the financial crisis, the yield on 3-month US Treasury bills has risen above most of the main gauges of inflation. Photo: AP
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