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20 / 06 / 2023

Are Treasuries Really a No Brainer?

Saw this chart in the Financial Times this week, and found it particularly interesting. Though, it does require some context and picking apart.






















At first glance, it does suggest something quite remarkable that whether you invest in treasuries, fixed income or equities in the US your return expectations are exactly the same. Something quite extraordinary.


Is the market going mad? Why bother holding anything but treasuries? That’s what an initial glance at the chart would suggest.


Firstly let’s consider the corporate bond yield. The average maturity of these bonds will be a lot further out than the 3-month treasuries. You aren’t really comparing apples with apples. If you were to compare to treasuries of the same maturity, the treasuries would yield closer to 3.8% rather than around 5.5%.


That’s not to say right now that three-month treasuries aren’t a good place to invest, but you have to consider your horizon and the horizon of the underlying assets. Once the yield curve is no longer inverted, we’ll be back to what you would expect.


On the comparison to S﹠P, again horizons are different. The earnings yield only considers the next 12 month of earnings, when many of those equities are expecting further growth beyond that, particularly those high growth tech stocks that have recently seen a strong rally.


Charts like this are always quite compelling, but it’s important to consider what they mean in a practical sense.


That being said, difficult to ignore some of those hugely compelling levels of yield from short term US or UK government bonds. If savings accounts aren’t earning you enough or you have some cash and not sure how to invest yet, certainly some short dated government bond or money market ETFs look like a great pick up for any portfolio.

Treasuries Yield vs Other Assets
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