Cash gains an edge over S&P 500 dividend yields

Three-month Treasury bill above 2% for first time in more than a decade

Peter Wells



The 2 per cent club has a new member. The yield on the three-month US Treasury bill crossed that milestone for the first time in just over a decade as the Federal Reserve remained on course to keep raising interest rates.

The yield on three-month bills is above 2 per cent for the first time since June 17 2008. The short-term market rate, viewed by investors as essentially a cash-like instrument and a very liquid haven in times of market turmoil, has doubled since the start of last September. The relentless rise in bill yields reflects a steady tightening of interest rate policy by the Fed, while the US Treasury has substantially boosted sales of short-term debt to help finance a worsening budget deficit.

The yield on the three-month T-bill has moved further above the trailing 12-month dividend yield of the S&P 500, in what probably signifies the dying moments of the Fed’s exceptional assistance to the stock market.

Since the 1960s, periods when three-month bill yields have been greater than the dividend yield of the S&P 500 have been relatively rare but have certainly not lasted for as long as the past decade. The most recent period stems from the Fed’s decision during the financial crisis to cut interest rates towards zero and conduct several rounds of bond purchases, known as quantitative easing.

A further climb in bill yields beckons as the central bank expects to deliver two more 25 basis point interest rate rises in 2018, while it has pencilled in three rate rises for 2019.

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