iShares Short Treasury Bond ETF (SHV) under pressure

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Thesis

The iShares Short Treasury Bond (SHV) ETF is an ETF that seeks to track the results of an index composed of Treasury bonds with remaining maturities of one year or less. The Fed minutes released yesterday describe a Fed much more hawkish than expected, with rates set to rise faster and the Fed’s balance sheet not only set to stop growing, but in fact start to contract sooner than expected. SHV has a very low duration of just 0.4 years, and currently has a stable 30-day SEC yield given its high management fees and is expected to come under pressure as yields rise. This vehicle has traditionally appealed to retail investors looking to park their cash in a safe vehicle (i.e., preservation of capital) while earning some return instead of holding cash directly. The current negative 30-day SEC yield, coupled with rising short-term rates, will make SHV an inappropriate store of value until the end of the tightening cycle. We are slightly Bearish here. We don’t expect this vehicle to lose more than -1% even if rates double tomorrow, but we don’t think a retail investor can gain anything using SHV. In our mind, in a rising interest rate environment, an investor should simply hold cash or buy very short-dated T-bills.

Holdings

The fund holds a mix of short-term treasury bonds (in terms of remaining maturity) and treasury bills:

Source: iShares

As mentioned above, the duration of the portfolio is very low, at only 0.41 years:

Source: iShares

Low duration means little impact from rising interest rates, although like any fixed income instrument, SHV loses value as rates rise, which is recovered as bonds undercut. underlying matures.

The fund has a high amount of assets under management:

Source: iShares

Given its assets under management, SHV is a vehicle used primarily by institutional investors attracted by the liquidity aspect and the ability to access the Treasury market through an exchange traded ETF rather than retail investors.

Performance

From a pure price perspective, the fund fell last year due to rising interest rates:

Source: In Search of the Alpha

Short-term rates are at incredibly low levels since the Covid-19 pandemic and are expected to increase:

Source: The Fed

We can see from the chart above that 1-year rates peaked at over 2.5% before the pandemic and are slowly rising as the Fed is about to end its asset reduction and start. to increase rates. As rates rise, the underlying assets that make up SHV lose value. Parking cash in a vehicle that has no mathematical benefit makes very little sense to a retail investor.

Reminder of the chronology of the past Fed cycle

Let’s see how the last round of Fed tightening went:

  • may 2013: Ben Bernanke first alluded to tapering
  • December 2013: The Fed announced the reduction of bond purchases by $ 10 billion per month

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  • october 2014: Fed completes the tapering

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  • december 2015: The Fed hiked interest rates by 0.25 percentage point to reach a target range of 0.25% – 0.50%

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  • december 2016: After a year, the Fed again raised its rates within a target range of 0.50% to 0.75%, with lower unemployment

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  • march 2017: Rates rise to a target rate of 0.75% – 1.00% against the backdrop of a solid job market
  • june 2017: Interest rate target moved to 1.00% – 1.25%
  • december 2017: Interest rate target raised to 1.25% – 1.50%

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  • march 2018: Under new leadership of Jerome Powell, Fed hikes rates within 1.5% to 1.75% range
  • June – December 2018: Rates gradually increased to 2.5%

Conclusion

The iShares Short Treasury Bond ETF is an ETF that holds treasury bills and short-term treasury bills (maturity less than 1 year). The vehicle is designed to resemble a money market account which is a store of value and also offers an improved return over just holding cash. Due to the low interest rate environment, SHV currently has a stable 30 day SEC yield. The underlying assets are going to be under pressure as short term rates rise more aggressively than expected and will not provide the store of value that a retail investor expects. It is best to avoid until the current tightening cycle is well under way and the fund begins to generate substantial positive returns which can offset the low rate induced prices.

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