Trade Alert – Both Portfolio Models
This morning we shifted 5% from BIL to SHY (1-3yr UST). With the Fed approaching its terminal rate for the cycle and odds increasing that they start lowering rates aggressively over the next two years, we want to get the 4.70% two-year yield with the possibility of earning a few percent in principal gains as well. BIL will yield a little more over the shorter term, but that will likely come down over time with zero principal gains.
The graph below shows that the 2yr note tends to lead the Fed on the way up and the way down. This occurs because the two-year note is based on the current Fed Funds rate and expectations for future Fed Funds rates. As the graph shows, market and FOMC expectations for Fed Funds over the next two years are lower. Both predictions provide a reasonable expectation of two-year yields over the next two years. Of course, if the Fed cuts rates at a pace like the last three recessions, Fed Funds may be much lower than both expectations.
Both Models
- Sell 5% Of The Portfolio Value Of The SPDR Barclay’s 1-3 Month Treasury Bill ETF (BIL)
- Add 5% Of The Portfolio Value To The Existing iShares 1-3 YEAR Treasury Bill ETF (SHY)
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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