After more than 20 years, certain risk-free investments have proven more profitable than a portfolio containing 60% stocks and 40% bonds.
On Tuesday, six-month US Treasury bills saw a high yield of 5.14%, the most in thirteen years. This surge surpassed the 5.07% yield from a mixture of US stocks and bonds since 2001, per the combined average yield of the S&P 500 and the Bloomberg USAgg Index.
The shift symbolizes how the Federal Reserve’s boldest monetary restraint since the 1980s has disrupted present investments. It has incrementally elevated “risk-free” interest rates, including short-term Treasuries, and is a foundational point in global financial markets.
Investors Risk Averse Now
With the dramatic rise in payouts, the willingness of investors to risk their money has declined. This resulted in a break from post-financial crisis days when low-interest rates pushed them towards higher yield speculative investments. These kinds of investments are normally termed cash in the investment field.
During the past fifteen years, keeping a large sum of cash and avoiding market activities were costly practices. However, in this new era, those who exercised such caution are now being rewarded by aggressive policies, according to Andrew Sheets, strategist head at Morgan Stanley.
On February 14th, the interest rate for six-month US government bonds crossed 5% for the first time since 2005, and it was slightly higher than the yield on 4-month and one-year bonds. This reflected how investors expect a potential dispute when the federal debt limit comes into play.
Lucrative Treasury Bills Yield
The 60/40 yield has increased due to stocks becoming less expensive and Treasury yields climbing. However, this rate of increase was less dramatic than that of T-bills. Six six-month bills rose 4.5 percent points during the past year, and the yield exceeded 10-year notes by 1.25 percentage points.
Sheets points out that the current high rates on short-term Treasuries are causing reverberations throughout financial markets. Regular investors now have less incentive to take on more risk, and leverage and currency-hedging for foreign investors have become more costly. Moreover, it has become more expensive for investors to use options to bet on higher stocks.
Recently, bond investments and stocks has proven to be difficult. The 60/40 portfolio began the year with success, and the momentum vanished as inflation, and economic data pushed investors to forecast a higher Fed policy rate. As a result, stocks and bonds have suffered from simultaneous price drops. The 60/40 strategy has returned a 2.7% for the year, following a 17% dip in 2022. According to Bloomberg’s index, this is the most significant decrease since 2008.
