Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Fixed Income Strategy
Summary: US T-bills offer an average yield of 5%, the highest in over fifteen years. In other words, amid a highly uncertain market context, you get paid to stay on the sidelines and wait for more favorable market conditions. As the Federal Reserve hiking cycle peaks, T-bills are preferable to US-Treasury floaters. Investing in short-term government bonds in the Saxo Platform is straightforward and compelling as they are one of the safest investments available to USD investors. Yet, you should know that they carry significant interest rate risk and are exposed to the debt ceiling problem.
Whether or not you have been an active investor, paying attention to the bond market has become necessary. The US yield curve is inverted; therefore, short-term US government bonds offer a higher yield than long-term bonds, providing an opportunity not seen in markets for more than fifteen years.
Simply put, investors are getting paid to park money while an overvalued market builds up for another crisis. Besides, T-bills offer an alternative to deposit interest rates, as they continue to be below the yield provided by money markets.
Investing in short-term US government bonds is compelling even for active traders. When looking at the Saxo universe, bonds can be used as collateral for margin trading. That means that professional clients can put cash at work in US government bonds, receive interest payments, and use collateral to trade other products.
T-bills are one of the safest investments available to USD investors. Yet, you should know that they carry interest rate risk and move substantially around the debt ceiling issue.
T-bills' interest rate risk derives mainly from the Federal Reserve monetary policies. If the central bank hikes interest rate, existing T-bills will drop in value since their rates are less enticing than those available in markets. Given that the Fed interest rate hiking cycle is peaking, T-bills become a preferable investment compared to US-Treasury floaters, which coupon rises as the rates increase.
At the same time, the recurring debt ceiling turmoil increases volatility in certain T-bills because the market fears the federal government will run out of money to pay its bills if it’s not allowed to issue new debt. The market is currently pricing the debt ceiling to become a problem in summer, pushing yields of those T-bills maturing between June and September higher. That’s the reason behind a yield above 5% for summer maturities, while longer T-Bills maturities offer less than 5% in yield. Nonetheless, the market understands that a default by the US Treasury is very unlikely as it could prove devastating economically for the entire world. Therefore, politicians are reluctant to end up in such a situation, and the premium investors are getting for T-bills maturing in summer does not reflect the worst-case scenario.
Interestingly, the yield offered by one-month and three-month T-bills is the highest offered since 2000, breaking even above the peak of February 2007 (Image 1).
You can use the instrument screener to search for T-Bills on the Saxo platform (see picture below).
Product: Bonds
Issuer type: Government
Country: USA
Keyword: Tbill
You will find 19 T-bill securities, which you will be able to trade straight away by clicking on them.