Fixed Income

What to keep in mind about high short-term rates in the U.S.

What to keep in mind about high short-term rates in the U.S.
Key takeaways
Inverted yield curve

Investors are getting better yields from short-term bonds than from longer-term bonds.

Reinvestment risk

Attractive short-term yields come with the risk of having to reinvest at a lower rate later. 

Reallocation option

Beginning to move money from T-bills to corporate bonds can minimize this risk.

In normal markets, the yield curve — a line chart showing yields of Treasuries at various maturities — is upward sloping, meaning long-term interest rates are higher than short-term rates. The U.S. yield curve is currently inverted, and an investor is getting far more yield investing in short-term bonds than those with longer maturities. The 5.21% yield on the 3-month U.S. Treasury (T-bill) is at a level we haven’t seen in 22 years.1 Meanwhile, a 30-year T-note is yielding 3.82%.2

While it’s nice to get attractive yields without much duration risk (sensitivity to interest rate changes), knowing what the yield curve could look like in the future can help bond investors. The implied yield — the difference between the current 3-month T-bill rate and where it could be in 18 months (derived from the forwards market) — is an indicator of future rates (see chart below). The current spread of -1.95% shows that 18 months from now, the 3-month U.S. T-bill is expected to be priced nearly 2% lower than it currently is.3

Yields on U.S. short-term bills are expected to be lower

Source: Macrobond, Bloomberg L.P. Data as of 5/8/2023. Bloomberg 3-month treasury in 18 months (G0025 Currency - USGG3M Index). Grey denote NBER-dated recession periods. There is no guarantee that forecasts will come to pass. An investment cannot be made in an index. Past performance is not a guarantee of future results.

With U.S. short-term rates the highest in decades, it’s tempting to keep a large allocation to cash equivalents like T-bills. However, that introduces reinvestment risk —the probability of not being able to reinvest this money at the same rate.

In our opinion, the best way to minimize reinvestment risk is to begin to move from T-bills into more traditional bonds such as corporates. For instance, since 2008, the monthly return on U.S. corporates bonds has outperformed U.S. T-bills by 425 basis points on average (see chart below).4 Investors, of course, won’t be able to time the market perfectly when doing this. But it will, at least, minimize the risk of having to invest in 3-month T-bills at a lower rate when the yield curve returns to normal and short-term rates are lower than long-term rates.

U.S. corporate bonds have outperformed short-term bills

Source: Macrobond. Returns since 2008. Dark blue columns signify the Bloomberg Barclays US Corporate Bond Index, bright blue bars signify the Bloomberg 1-3-month T-bill Index. T-bills are backed by the full faith and credit of the U.S. government. Corporate bond repayments are based on the credit of the underlying corporation. An investment cannot be made in an index. Past performance is not a guarantee of future results.


  • 1

    Bloomberg L.P.  Data as of 5/8/2023

  • 2

    Bloomberg L.P.  Data as of 5/8/2023

  • 3

    Macrobond, Bloomberg L.P.  Data as of 5/8/2023

  • 4

    Macrobond, Bloomberg L.P.  Data as of 5/8/2023

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