Trending now: Treasury ETFs

In 2020, many investors have shifted the focus of their fixed income portfolios from the return ON principal, to the return OF principal. Karen highlights how the desire for stability is driving investors to tap into U.S. Treasury markets with ETFs.

The market volatility since the start of the COVID-19 crisis has highlighted one of the main reasons why investors own bonds: potential for principal protection. When the crisis first started in March and April, investors began to drastically shift their portfolios to cope with the new environment. As a result, short-term U.S. Treasuries have been a popular investment given the potential stability they can provide. Given their newfound popularity, let’s take a closer look at this critical sector of the bond market.

Return ON principal vs. return OF principal

Income generation and principal protection are two common fixed income objectives that are constantly at odds. If you’re aiming for principal protection, then short-term Treasuries such as Treasury bills (T-bills) may be right for you. While right now they don’t provide the yield potential as other securities, they have the advantage of being one of the lowest risk investments available.

Why? They have almost zero credit risk—they are backed by the full faith and credit of the U.S. government—and are typically not very sensitive to interest rates because they come in maturities of anywhere between one month and one year.

U.S. Treasury supply is ramping up to meet demand

The U.S. Treasury Department has responded to the investor demand for T-bills by increasing net issuance to $1.5 trillion compared to $77 billion in 2019. As you can see in the chart below, the net issuance in 2020 is about to double from the levels in 2008—underscoring investor demand for principal protection.

In April 2020, demand for T-bills spiked and something unheard of happened—they briefly had negative yields in the secondary market. Why? An onslaught of investors seeking the protection of government securities pushed prices up and yields down. Going forward, we believe the increase in issuance should help keep short-term Treasury rates positive. You can view the Treasury auction results on a publicly available website here.