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With the US interest rate increasing so much lately, I am interested in putting some more of my money into US treasury bonds. I am looking at the SHY ETF on Fidelity, which is an ETF comprising short-term (1-3 year) treasury bonds.

Now, I am far from an expert in bond investing and perhaps I am misinterpreting, but looking at the numbers that are shown, the annual yield looks pretty poor. The most recent distribution on 11/1 was $0.14, which is monthly. So, annualized that would be $1.68. The current market price for SHY is about $81, which seems like it will give an annual return of around 2.1%.

As far as I am aware, the current interest rate on short-term US treasury notes is somewhere around 4.5%. So, why does the apparent yield from SHY seem so low, by comparison?

I understand that an ETF is going to contain bonds that were issued over the past 2-3 years, which would have been issued at much lower interest rates. However, if bond interest rates rise, shouldn't the ETF market price drop to give a similar % yield (otherwise, why would anyone consider buying this ETF)?

Am I missing something?

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2 Answers 2

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As of 11/23, the "30 Day SEC Yield" is 4.45%, whereas the backward looking"12m Trailing Yield" (TTM) is only 0.92%

https://www.ishares.com/us/products/239452/SHY

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  • Thanks for your answer. However, I still can't quite square this with the most recent monthly distribution on 11/1 being only $0.14. Is the '30 day SEC yield' expecting that the monthly distribution will be increasing in the future?
    – Time4Tea
    Nov 29, 2022 at 11:36
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I'm pretty sure it's as simple as that it takes some time for holdings to turn over. The Fed only first hiked rates in March, and the March and May hikes were not the big 75 bp hikes we've seen since. Thus SHY was holding bonds with a coupon of about 0% until just a few months ago. SHY's purpose is to hold bonds with a remaining maturity of 1-3 years, which as I understand it means they more or less never hold bonds till maturity; that means SHY's yield comes from actual coupon payments together with time decay of holdings that were purchased below par. Treasuries only pay out every six months, so SHY hasn't received coupon payments from any of its current holdings with a high coupon. Similarly, for time decay, SHY's trades were probably almost all at a loss all year as rates steadily shot upward; it's only now that it can begin to hope that it can realize effective yields of 4% or so on recent purchases, which will steadily become more obvious over the next six months or so in its distributions.

Indeed, while the most recent distribution annualizes to only about 2%, if you look further back, you can see it's quintupled since this spring. Sure, it hasn't yet caught up to the yield of a treasury you could buy directly, but if you did that, you'd still have to wait for either a coupon payment or for some time decay! So there's no easy way to do very much better than with SHY.

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    "it means they more or less never hold bonds till maturity" ---> not necessarily. It means they don't have to buy on-the-run securities that were issued with a 1-3Y maturity. For example, they could buy 5Y or 10Y bonds that were issued several years ago with only a few years remaining until maturity. You can refer to the iShares website for a list of the actual holdings. Also, I'm not sure what you mean by "time decay"?
    – 0xFEE1DEAD
    Nov 29, 2022 at 3:26
  • Ok, thanks. So, you would expect the monthly distribution amounts to increase quite rapidly in the next 2-3 months?
    – Time4Tea
    Nov 29, 2022 at 11:38
  • @0xFEE1DEAD By "time decay" I mean the appreciation of the trading price of a bond with coupon below its current yield, as it converges to the face value upon maturity. I don't know whether there's a normal way to refer to this, just seemed analogous to an option. I'm not sure I see your point about 5Y or 10Y bonds with 1-3 years maturity; if you look at SHY's holdings, you'll see there is indeed no holding with a remaining maturity of more than 11 months. And holding bonds with remaining lifetime 1-3 years is indeed what they claim to do. Nov 29, 2022 at 20:24
  • @Time4Tea Yes, I expect that process (which is already very visible) to continue. Nov 29, 2022 at 20:25
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    @KevinArlin ok I see what you mean. Generally speaking you're right that they usually won't HTM but there's some flexibility (currently about 9% are allocated to the 0-1Y bucket)
    – 0xFEE1DEAD
    Nov 29, 2022 at 21:51

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