Investors have been parking cash in short-term government debt at a record pace. BlackRock's iShares 0-3 Month Treasury Bond ETF, which holds only U.S. Treasury bills, is closing in on $100 billion in total assets. It took BlackRock's flagship bond fund two decades to reach that size. This one might get there in under six years.
The reason is simple. Three-month Treasury bills are currently yielding about 3.8%. That is down from the multiyear high of 5.5% back in 2023, but it is still well above the start of the year, when yields were under 3.6%.
And unlike longer-term bonds, T-bills carry almost no risk of losing value if interest rates move. The fund's share price has stayed between $100.28 and $100.74 over the past year. Basically, your money does not bounce around.
"Steve Laipply, global co-head of iShares Fixed Income ETFs at BlackRock, said about the fund's growth": "It's really accelerated. Investors view it as a place to earn yield while they're trying to decide their next steps in allocation."
The gap between cash and bonds has been huge. If you put $1,000 into the broad U.S. bond market five years ago, you would have about $1,004 today. That is almost no growth. The same $1,000 invested in Treasury bills would be worth nearly $1,200.
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That performance gap helps explain why money-market funds have exploded. Combined they now hold $8 trillion. That is more than double what they held in 2020. The largest money-market fund, run by Fidelity, alone has $456 billion.
The iShares T-bill ETF has an expense ratio of just 0.09%. Money-market funds average 0.24%. So you keep more of your yield.
And the fund is seeing roughly $1 billion in new money every single week. In early June, it logged a record $3.3 billion in a single week.
Meanwhile, investors have pulled $3.2 billion this year from two of BlackRock's other bond ETFs. One focuses on high-yield corporate debt. The other holds long-term Treasury bonds. Both have longer maturities, which means more risk when rates move.
Investors' preference for cash-like instruments is partly driven by uncertainty over the economic outlook. With inflation still above the Fed's 2% goal and the possibility of rate hikes, many are hesitant to lock in longer-term bonds or take on stock market risk. The "T-bill and chill" approach allows them to earn a solid yield while maintaining flexibility.
The market now expects at least one rate increase over the next year, because inflation is still above the Fed's 2% target. Even after six rate cuts over two years, short-term yields have stayed surprisingly high.
According to Tony Rodriguez, who oversees fixed-income strategy at Nuveen Asset Management: "Rates are a little higher, and they'll remain higher for longer. We're talking about 3% to 4% rates at the short end for a while."
If the Fed raises rates again, short-term products like this ETF will benefit. Their yields will climb, and their prices will stay stable. Longer-term bonds would take a hit.
Wall Street has a nickname for this strategy: "T-bill and chill." It means earning a decent yield with almost no stress while you wait to see what happens next. For investors who are nervous about stocks at near-record highs or bonds that might fall, that is a pretty appealing trade. The cash pile keeps growing, and it shows no signs of slowing down.
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