For the first time in more than two decades, some of the world’s risk-free securities are delivering bigger payouts than a 60/40 portfolio of stocks and bonds.
The yield on six-month US Treasury bills rose as high as 5.14% Tuesday, the most since 2007. That pushed it above the 5.07% yield on the classic mix of US equities and fixed-income securities for the first time since 2001, based on the weighted average yield of the S&P 500 Index and the Bloomberg USAgg Index of bonds.
The shift underscores how much the Federal Reserve’s most aggressive monetary tightening since the 1980s has upended the investment world by steadily raising “risk-free” interest rates — such as short-term interest rates. Treasuries – used as a global baseline. financial markets.
The sharp jump in payments has reduced the incentive for investors to take risks, marking a break from the post-financial crisis era when chronically low interest rates led investors to more speculative investments to generate more income. Such short-term securities are usually called cash in investing parlance.
“After a 15-year period often defined by the extreme cost of holding money and not participating in the markets, the hawkish policy is rewarding caution,” Morgan Stanley strategist led by Andrew Sheets said in a note to clients.
The yield of six months pay rose above 5% on February 14, making it the first US government obligation to reach the threshold in 16 years. That yield is slightly higher than the 4-month and one-year bills, indicating the risk of a political battle over the federal debt limit if it comes.
The 60/40 yield has also risen since stocks fell and Treasury yields rose, but not as fast as T-bills.
High rates on short-term Treasuries are sending broad ripples through financial markets, according to Sheets. This reduces the incentive for average investors to take more risk and increases the cost for those who use leverage – or borrow money – to increase returns. He said it also cut currency-hedged yields for foreign investors and made it more expensive to exercise options bets on higher stocks.
Investing in stocks and bonds has also been challenging lately. After a strong start to the year, the 60/40 portfolio gave up most of its gains since a set of strong economic and inflation data prompted investors to bet on a higher peak of the Fed’s policy rate. That sparked a simultaneous selloff in stocks and bonds this month. The 60/40 strategy returned 2.7% this year, after falling 17% in 2022 in the biggest decline since 2008, according to the Bloomberg index.
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