With the Fed, the Bank of Japan and the Bank of England all meeting this week to update their policy projections, a lot of the market’s attention has been focused on interest rates. Specifically, where they’re heading next.

In December, the Fed projected three rate cuts in 2024. This past week, they reiterated the three rate cut forecast, but I’m still skeptical. Inflation actually looks like it might be re-accelerating again and, if that’s the case, it’s tough to see how Powell can justify dropping rates multiple times, especially since the U.S. economy is still growing at a 2-3% clip. If growth can support elevated inflation for the time being, why not keep rates where they’re at to make sure you’re bringing inflation back down? If growth slows or stagnates, then you can revisit the idea of cuts, but I just don’t think there should be any urgency to loosen conditions.

The bond market seems to agree.

Long-term Treasury yields initially dipped in the aftermath of the Fed, but are now back to where they were pre-meeting. Inflation has begun trending in the wrong direction again and I believe that the Fed will turn hawkish again before it ever gets to three rate cuts. My base case expectation is for two rate cuts by year-end.

My point in telling you this is that I think we could be headed into a prolonged period of “higher for longer” when it comes to interest rates. That could ultimately prove to be a negative for stocks or perhaps long-term bonds.

Who it should not be considered negative for is those generating income from their portfolios, especially retirees.

5%+ Yields Still Available For Income Seekers!

From 2009 to 2016, Treasury bills literally yielded next to nothing. The Fed dropped the Fed Funds rate down to 0% following the financial crisis and pretty much just decided to leave it there indefinitely as long as inflation didn’t pick up. From 2016 to 2019, the Fed tried to slowly normalize interest rate policy, but that ended abruptly with the COVID pandemic and rates went right back to 0%.

After a few years of finally getting some yield from their fixed income investments, income seekers were suddenly back to square one. As a result, investors pushed further out on the duration spectrum and further down the credit quality ladder to capture the yields they couldn’t find elsewhere. Some even migrated over to dividend-paying stocks as a yield alternative.

But those days are over. Unfortunately, it took a 9% inflation rate to pull the Fed out of ultra-accommodative policy mode, but it happened. Now, we’ve got a Fed Funds rate at 5.25% and that means yield seekers have a lot of options again!

Right now, 4-5% yields are available pretty much anywhere on the U.S. credit curve.

For retirement investors, I’m looking specifically at the short-end of the U.S. Treasury curve.

If you consider longer-term Treasuries, you expose yourself to duration risk and potentially a lot of volatility. If you look at corporate, you add credit risk to the equation. Both of those categories tend to be heavily influenced by economic events.

Treasury bills and ultra short-term Treasury bonds are tied very closely to Fed policy and carry very little risk. So many investors today are focused on maximizing their return potential with little regard for the risks involved in achieving that return. If you focus instead on risk mitigation and safe income generation, Treasury bills are an awfully attractive option, in my opinion.

The “New” 4% Withdrawal Rate

In retirement, we hear a lot about the “4% withdrawal” rule, which suggests that retirees can withdraw 4% of their savings every year with minimal risk of outliving their savings. It’s just a general rule and won’t work for everyone, but it’s a good guideline to start with anyway.

Today, you could earn 5% on your retirement portfolio by investing, for example, in the iShares Short Treasury Bond ETF (SHV) and never even touch the principal! If you earn 5% on your portfolio and withdraw 4% of your total nest egg balance over the course of a year, you’d be abiding by the “4% withdrawal” rule AND your portfolio would still be growing! And it’s virtually risk-free!

I think investors have spent so much time looking at the magnificent 7 stocks & the new highs being achieved by the S&P 500 and forget that retirement investing is still about risk mitigation and income generation, not necessarily maximizing returns and overexposing yourself to risk.

Of course, investing in T-bills isn’t necessarily a “set it and forget it” option. Yields will fluctuate over time and it’s probably still a good idea to diversify at least some of your portfolio into stocks, but a 5% nearly risk-free yield shouldn’t be ignored as a viable option in your toolbox.

Here’s the current layout of the ultra short-term bond ETF market, both government & corporate bonds.

Lots of cheap options and lots of 5%+ yielding options still. The SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) is the biggest of the bunch, although it’s not the cheapest. Cost is going to be an especially important factor in this category because expenses eat directly into a fund’s yield. Since Treasury ETFs are mostly investing in the same thing, the expense ratio could be a deciding factor.

The iShares 0-3 Month Treasury Bond ETF (SGOV) is the cheapest of the “big” ETFs at just 0.07%. The Global X 1-3 Month T-Bill ETF (CLIP) is less than a year old, but is an interesting contender in this category, also coming in at 0.07%. A pair of BondBloxx target maturity funds are the cheapest at 0.03%.

Speaking of target maturity ETFs, these can be a really nice option if you want to target a very specific maturity instead of just maturities within a range.

The U.S. Treasury series of ETFs offer these kinds of exposures. They simply hold the most recently issued maturity and then rotates into the newest maturity when it gets issued.

Summary

The key takeaway is that Treasury bills are an attractive income option for retirees today (or just income seekers in general). While it may not be appropriate as a long-term asset allocation, it certainly can make sense to overweight T-bills at a 5% yield in order to mitigate risk elsewhere in your portfolio. I’d be wise not to ignore them!

And you can give a shout-out to the Fed for keeping rates higher for longer!