Torsten Asmus
The iShares Short Treasury Bond ETF (NASDAQ:SHV) is a very short duration, zero credit risk Treasury portfolio. That means that SHV allows you avoid duration risk. It also gets you in the USD. The reality is that economic idiosyncrasies are kicking back into action for each economic bloc's inflation – no more universal supply shocks or other issues, at least not for now. It seems that of any country, the US may have a higher for longer situation more than anyone else, even with their dual mandate against more pointed inflation mandates elsewhere. That means long USD, short duration. SHV does both.
SHV Breakdown
Expense ratios are in line with other ultra-short duration fixed income ETFs, including iShares Floating Rate Bond ETF (FLOT), at around 0.15%. Effectively, there is almost no difference in duration between SHV and FLOT, where the former is a quarter of a year in duration. YTMs are obviously consistent with the duration's position on the yield curve as well.
Comments
The yield curve is clearly the most important thing to discuss for fixed income. Compared to a month ago, not to our surprise, rates have translated upwards, particularly 3-7 year rates as traders reposition having abandoned expectations of March cuts. Fixed income with a bulk of its PV in that range will therefore have traded down quite badly on the news, and the USD has strengthened with respect to other major currencies. Rate expectations have come up on account of still strong inflation, with disinflation slower than hoped.
Inflation may have been caused by supply shocks to begin with, but it ultimately settles at whatever rate is expected by economic actors. Those expectations reflect in wage growth, which is still ahead of 4% even, and of course, in surveyed rate expectations, which again are still above the 3% mark as according to the Michigan surveys.
Now, there is the chance for more policy divergence among nations, due to their idiosyncratic economic situations. Speculation is pointing in the direction of weaker inflation in Europe and scope for cuts there sooner than in the US. While Europe has bigger unions and a single-mandated ECB with a sole focus on inflation, we tend to agree with the current market consensus. Money velocity is lower in Europe, spending habits different, and the extent of consumer protection more expansive. They don't need as high rates to hit growth, and indeed we are already seeing weakness in European economies, meanwhile the US is still going very strong, with really very little sign of faltering. In general, the Ukraine war has impacted the world asymmetrically, with the US benefiting from imported inflation mitigation on a strong dollar, and new lanes for export of abundant natural resources, now more economically exploited than before.
The underlying strength of the US economy is being driven by hopeful soft landing expectations and higher underlying money velocity, both of which are impacting the effectiveness of the transmission of Fed policy, therefore requiring a more ham-fisted rate. Europe and other geographies tend to be much more pessimistic, which actually does some of the ECB's job for them. Higher wages also don't necessarily translate into more spending, which is where we are disagreeing with the ECB now, just like we did with the Fed when they started making their case with unimportant data like 2026 rate expectations. Japan is a good example of where wage hikes really just don't matter, since it all goes into savings and there's no marginal propensity to spend. This should be the case, although to a lesser extent in Europe.
Bottom Line
The bottom line is that wage growth matters more in the US than Europe, and expectations and economic activity is obviously stronger in the US, which is more inflationary. In general, disinflation will be harder to see in the US than in Europe, with a stronger economy having settled on higher rates based on collective expectations – hard to trounce without economic pain. Long dollar and short duration. SHV accomplishes both with very limited expense ratios.