Why the Headline Yield on TBills Fluctuate - Market Dynamics

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Arc Team


The headline yield on T-Bills, like other income-backed securities, fluctuates from day to day. Naturally, founders interested in T-Bills have asked about these fluctuations, more specifically they want to understand what factors impact the yield, and how they should be thinking about stacking T-Bills with varying maturities to balance returns and liquidity. We covered the later point in a blog post here, but we figured it might be beneficial to write a quick synopsis of why the headline yield changes both over time and from institution to institution—let’s dive in.

An Overview of T-Bills and T-Bill Yields

Treasury bills (T-bills) are short-term debt instruments issued by the United States Department of the Treasury to fund government operations. The return generated on T-Bills isn’t technically considered yield or interest, rather, it's simply the difference between the amount paid for the T-Bill at a point in time and the eventual payout that the holder receives, which is known as the par value, or face value. T-Bill yields are an important indicator of the state of the economy and are closely watched by investors.

The market dynamics that impact T-Bill yields

The yield or return generated from purchasing T-Bills on the open market and holding them to maturity can vary from day to day and provider to provider. When purchased directly from the government, through TreasuryDirect, there is much less variability, if at all. That said, the market dynamics that affect the yield include the time to maturity, the supply/demand, the current economic environment and monetary policy, upcoming or recently released economic data, and the general market sentiment. 

  • Time to maturity - Generally speaking, the further out the maturity of a T-Bill, the higher its yield. This is because longer-term T-bills are more exposed to interest rate risk and inflation risk, and investors demand a higher yield to compensate for these risks. 
  • Supply/demand - When there is high demand for T-bills, the price goes up, and the yield goes down. Conversely, when demand for T-bills is low, their price goes down, and the yield goes up. This is because investors are willing to accept a lower yield when they believe that the safety and liquidity of T-bills outweigh the returns they could get from other investments.
  • Inflation expectations - When investors expect higher inflation, they demand higher yields to compensate for the eroding purchasing power of their investment. Conversely, when inflation expectations are low, investors are willing to accept lower yields.
  • Economic environment - during periods of economic expansion: investors have a greater appetite for risk, and thus the demand for T-bills plummets, driving up the yield. The opposite is true during periods of economic contraction: investors have a lower appetite for risk, so they park funds in T-bills and other low-risk assets, driving down the related yield.
  • Economic Data Releases - Strong economic data may increase expectations of higher interest rates, leading to higher yields, while weak economic data may have the opposite effect.
  • Monetary policy - The Federal Reserve plays a role in determining the yield on T-bills, though not directly. When the Fed raises interest rates, the yield on T-bills also goes up, and vice versa. 
  • Geopolitical environment - When there is uncertainty and volatility in the global markets, investors flock to safe-haven assets like T-bills, which drive up demand and lowers yields.

To illustrate the impact of these market dynamics, we can look at the yield on T-bills during the COVID-19 pandemic. In March 2020, the yield on 3-month T-bills dropped to a historic low of 0.08% as investors fled to safe-haven assets amidst the uncertainty and volatility caused by the pandemic. However, as the economic outlook improved and inflation expectations rose, the yield on 3-month T-bills increased to 0.09% by December 2020. Now, in April 2023, the yield on 3-month T-bills is 4.57%.

Why the headline T-bill rate varies from provider to provider

If we’re being completely honest with one another, most providers are not transparent with the actual return generated from an investment. They advertise a headline rate, which is often much higher than the actual rate earned, in hopes that founders don’t look at their statements or ask follow-up questions. The headline rate, is kind of like the advised price at a used car dealership or the MSRP on a new car—in reality, most people don’t pay either if they come prepared and actually negotiate the price. T-Bills and other securities are very similar.

For example, let’s say Provider X, advertises an ETF that holds T-bills and other securities at 4.90% APY, Provider Y, advertises the same ETF at 4.90%. Given that they offer the same ETF, the expense ratio is the same, but the management fee or origination fee may not be.

Now let’s say Provider X charges 20bps and Provider Y charges 30bps for their management fee. Provider X uses an intermediary that also charges 15bps, Provider Y doesn’t have an intermediary but does charge an origination fee of 10bps. In this case, the net yield generated through Provider X is 4.55% APY, while the net yield generated by Provider Y is 4.50%. In this case, if the investment was held for less than a year, funds parked with Provider X would generate a higher return, however, if the investment was held for more than a year, parking the funds with Provider Y would generate higher returns.

Tips for minimizing the fluctuations in T-Bill yields

While it’s impossible to completely eliminate the fluctuations in the T-Bill yield, there are several strategies founders can use to minimize them:

  • Diversification: One of the easiest ways to reduce fluctuations in the yield on T-bills is to diversify your startup’s portfolio. By investing in a mix of different assets, including stocks, bonds, and T-bills, you can reduce the risk and variability of any one asset. Cash sweeps are also useful for reducing risk. 
  • Laddering: Another strategy for minimizing fluctuations in T-bill yields is to use a laddering approach. This involves investing in T-bills with staggered maturity dates so that a portion of your portfolio is maturing at regular intervals. This allows you to reinvest your funds at the current market rates, minimizing the impact of fluctuations in interest rates. For a more in-depth look, check out this guide to maximize yield with treasury bill ladders, and this guide if you want to learn how to structure T-Bill ladders to balance returns and liquidity.
  • Hold until maturity: Holding T-bills until maturity eliminates fluctuations in their yield. When you hold a T-bill until maturity, you are guaranteed to receive the face value of the bill, regardless of any fluctuations in market interest rates during that time.
  • Bond funds: If you want exposure to fixed-income securities but want to minimize fluctuations in yield, consider investing in a bond fund. Bond funds typically invest in a diversified mix of fixed-income securities, including T-bills, which can help to smooth out fluctuations in yield. Check out this guide for more information on the role of fixed-income securities in startups’ treasury management strategy.

More resources on T-bills

Final thoughts on fluctuations in T-Bill Yield

The reality is that the return on most investments, including T-Bills, vary from day to day, week to week, and month to month. In the US, we operate in a free market, which means that every second of the day there is a systematic repricing of risk. Rather than optimizing for a few extra bips by seeking out the highest net yield, consider finding a partner that provides access to the financial tools and diversification you are looking for, while taking your best interests to heart. If you’re interested in such a partner, check out Arc—we’ll help put your treasury management strategy on autopilot.

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