What To Make Of 0% Yield

So you thought interest rates were low already? They hit a new bottom earlier this month when three-month Treasury bills (T-bills) were sold at a zero percent yield for the first time ever. This made many investors scratch their heads: Who would want a yield of zero? Several people have asked me this question recently, so let’s take a closer look.

What Zero Percent Yield Actually Means

On the surface, a zero percent yield for a T-bill doesn’t seem that attractive. However, it’s important to keep in mind that different investors buy bonds for different reasons. If you’re looking for income from your bond investment, then of course you wouldn’t want to buy something that yields zero percent. But if you’re an investor looking to buy T-bills because you want a safe place to park your cash, want to potentially reduce portfolio risk, or because you just need to buy something, then zero percent yield may be the way to go.

What do I mean by “need to buy something”? A good example is a portfolio manager for a government money market fund. The fund can only invest in government securities, so if they have money to invest in the market that zero percent T-bill might be what they purchase. In today’s environment, zero percent is the going rate for T-bill, whether purchased at auction or in the secondary market.

Safety Versus Yield

There are other investors who may value safety over yield. For example, an institution such as an endowment or pension fund may have most of their portfolio in risky assets like stocks and a portion in T-bills to lower their overall portfolio risk. For that investor, who is looking for safety, the yield on a T-bill isn’t that important. Most of their return is going to be coming from their stock investments. The T-bill holding is not there to generate income, but rather to balance against the riskier stock holdings. The reality: Even a one percent T-bill yield wouldn’t have a massive impact on their overall portfolio return.

And as bad as a zero percent return is, it actually can get worse. Just a few weeks after the zero percent auction, the Treasury held an auction that would have resulted in a negative yield. The Treasury Department rules don’t allow T-bills to be auctioned at negative rates so it was rounded up to zero. Some other markets don’t have similar rules. In Switzerland, for example, short term government bond rates are -0.75 percent, and even a 10-year security yields only -0.25 percent.

The Yield Picture Ahead

My colleagues and I believe that the Federal Reserve won’t increase interest rates until 2016, which means that T-bill yields near zero percent may be with us for a little while longer. Investors need to think carefully about what their fixed income investment is for. If it is to generate income, then that zero percent T-bill probably won’t be playing a big role. But if you are looking to fixed income to reduce portfolio risk then even zero percent may interest you.


Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.