“Be fearful when others are greedy and greedy when others are fearful” is a Warren Buffett mantra that reverberates throughout Wall Street and never has this seemed more appropriate than in short-duration US Treasuries.
The prospect of the US government defaulting on its debt is getting closer to becoming a reality amid a stalemate between Democrat President Joe Biden and Republican Speaker of the House Kevin McCarthy.
The latter is currently yet to agree to raising the country’s debt limit which hit the $31.4trn ceiling earlier this year.
US Treasury Secretary Janet Yellen has warned the country could default on obligations in less than two weeks on 1 June, a scenario that would represent a “constitutional crisis” and “an economic and financial catastrophe”.
The prospect of this has spooked investors on both sides of the Atlantic with the iShares Short Treasury Bond ETF (SHV), which has an average maturity of 0.30 years, seeing $3.2bn outflows over the past week, the most across all US-listed ETFs, as at 17 May, according to data from ETFLogic.
Meanwhile, European investors pulled $138m from the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) over the same period while piling a combined $417m into the iShares Physical Gold ETC (IGLN) and the Invesco Physical Gold ETC (SGLD), a risk-off play.
Ultrashort duration US Treasuries have felt the brunt of the crisis, in particular. One-month yields, for example, have jumped to almost their highest level on record at 5.595%.
The price dislocation in the short-end of the yield curve is most interesting from a tactical asset allocation perspective. Not only will investors be locking in yields of over 5%, but short-duration US Treasuries provide protection in one of the toughest market environments in decades.
As former PIMCO CIO and bond king Bill Gross told Bloomberg: “It is ridiculous. It is always resolved, not that it is a 100% chance, but I think it gets resolved.
“I would suggest for those who are less concerned, similar to myself, that they buy one-month, two-month Treasury bills at a much higher rate than they can get from longer-term Treasury bonds.”
The world's largest asset manager BlackRock is also looking to take advantage of any sell-off that is driven by default concerns.
"The debt ceiling showdown is set to increase the volatility in financial markets that has defined the new regime," BlackRock said. "Any sell-off may cause risk assets to better price in the economic damage we expect from interest rate hikes.
"We are ready to shift our views on a 6-12-month horizon to take advantage of opportunities that may appear."
Obviously, there is a slim chance that the US does the unthinkable and defaults on its debt but the noise coming from Washington appears to be positive. Biden is now directly negotiating a deal with McCarthy with both parties appearing to push for an agreement.
“The leaders have all agreed. We will not default. Every leader has said that,” Biden stressed, according to Reuters.
To access the ultrashort US Treasuries market, ETF investors have a number of options including the $1.3bn iShares $ Ultrashort Bond UCITS ETF (ERND) which has an average maturity of 0.67 years. For more active exposure, the JPMorgan USD Ultra-Short Income UCITS ETF (JPSA) has a maturity of 0.9 years.
With investors yanking assets from ultrashort ETFs, now could be the time to heed Buffett’s advice and take advantage of the attractive yields on offer.