Short Term Yields

by JDH on April 29, 2023

Today I present two charts for your consideration.

First, the United States 1 Month Government Bond Yield (a one-month chart):

Next, the United States 3 Month Government Bond Yield (a one-month chart):

See the difference?

In the last week, the 3-month yield has dropped from 5.29% to 5.09%, which may not sound like much, but for a short-term bond, that’s massive.

But in the last five days, the 1-month yield has increased by 100 basis points, from 3.3% to 4.3%.  That is an epic increase.

So what’s going on?

Investors want very short-term bonds and don’t want to risk holding a 3-month bond, so they are selling the 3-month and buying the 1-month.

How bad does the economy have to be for investors to be worried about locking in their money for three months?  What kind of epic collapse is coming?

The answer is that the US debt ceiling deadline could hit at some point in May, which is less than 30 days from now.  If the US government defaults, do you want to be holding long-dated bonds?  No, you want short-term securities.

By default, I don’t mean that the US government will stop paying everyone and the dollar will be worthless.  A default will look more like “bills getting paid late” until they work out a deal, which they will.  It is this uncertainty that has investors spooked.

How do you play it?

I don’t know.  Presumably, if the yield on longer-term bonds is dropping, the price of the bonds is increasing, so buying longer term maturities is probably a good strategy.  However, I don’t know when the deal will be done, so I offer no advice.

I will leave it to the reader to figure it out for themselves.

Good luck (to us all).