Why does the yield on SHY (US treasury bond ETF) seem so bad?

Question

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?

Answer 1

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

Answer 2

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.