SPDR Portfolio Short Term Treasury ETF

SPTS

Market cap $5.78B

SPTS offers a Treasury portfolio with moderate duration but still has some duration to be sensitive to changes in the forecast Fed rate cut path. Inflation remains above target, with producer prices rising, signaling more inflation is loaded in the chamber. Though a softening labor environment could prevent that inflation from passing on. Yield curve suggests rate cuts are expected within a year, and the FOMC dissent is there, with the growth mandate clearly more on their minds now than before.

SPDR Portfolio Short Term Treasury ETF offers quite low duration risk and ultra-low fees. Concerns about the USD's reserve currency status, US credit rating downgrades, and foreign selling pressure make Treasuries less attractive amid internal and international political uncertainty. While SPTS is preferable to iShares alternatives for this duration, any unnecessary investment in USD Treasuries is unwise, where there is also little benefit in duration speculation and baseline yield.

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SPTS offers exposure to short-term Treasuries that still offer high income, but without the high-interest rate risk that 10-year or 20-year Treasuries represent. The latest CPI report for January is yet another indication that inflation will take time to come down to the Fed's target. With a tight labor market and a strong consumer appetite potentially contributing to sticky inflation, the front end of the curve seems to be offering the most attractive risk/reward ratio.

Short-term Treasuries remain attractive; SPDR Portfolio Short Term Treasury ETF (SPTS) offers stability and income, with a focus on 1-3 year maturities. SPTS has a low expense ratio of 0.03%, making it one of the cheapest options for accessing short-term Treasuries. The fund's 30-day SEC yield of 3.98% outperforms most savings accounts and money market funds, offering a tempting income opportunity.

The ECB cut rates by 25bp as widely anticipated, but a slightly hawkish tilt bear flattened the EUR curve, which in our view remains priced aggressively. In the US, as the markets head towards the Fed's first rate cut, the probability of a larger cut rose slightly on Thursday.

Institutional adoption of ETFs continues, which should make all investors happy. In a new report from S&P Dow Jones Indices, the amount of money U.S. and Canadian “asset owners” held in ETFs increased 22% to $56 billion in 2023.

It generally takes a few years for changes in Federal Reserve rates to fully impact bond fund dividends. Bond funds are still benefitting from prior rate hikes. Perhaps by enough to cancel out any future rate cuts. By my estimations, and under current Fed guidance, most bond funds would only start to see declining dividends in 2025, at the earliest.

Treasuries have rallied in recent weeks, though fundamentals don't quite justify the move. Importantly, the yield curve remains inverted, which means investors get paid more while risking less at the front end. While the 1-3-year segment is the best of the coupons, it's hard to look past the risk/reward in the bills.