BILS - XHLF: 6 Month Treasuries In A Fund Format

2023-04-25 06:24:10 ET

Summary

• BondBloxx Bloomberg Six Month Target Duration US Treasury ETF is an exchange traded fund.
• The vehicle aims to provide investors with the total return of six month treasuries, and falls in the cash parking vehicles box given where the yield curve is.
• The fund is extremely cheap by any standards, charging only 0.03% in fees.
• The 4-month and 6-month points in the yield curve provide the highest dividend yields currently.

Thesis

As treasury rates have risen to levels which were reserved for high yield not so long ago, we continue to investigate funds which provide investors with exposure to the treasury space and implicitly rates. The BondBloxx Bloomberg Six Month Target Duration US Treasury ETF ( XHLF ) is a new fund from BondBloxx. The vehicle was IPO-ed in September 2022 and aims to provide investors with the total return of six month treasuries:

The Fund is non-diversified and seeks to track the investment results of the Bloomberg US Treasury 6 Month Duration Index (the “Index”). The Index is comprised of certain U.S. Treasury bills that are included in the Bloomberg US Treasury Bill Index (the “Underlying Index”). The Index is constructed using two underlying “duration buckets” of U.S. Treasury bills included in the Underlying Index that are weighted by market capitalization of their component securities and then blended according to the weighting required to match the 6 month target duration of the Index at the monthly rebalancing date.

The fund has monthly distributions and a minute management fee of only 0.03%, while rebalancing monthly.

It seems that every new vehicle that gets IPO-ed has lower and lower fees. This represents a good outcome for investors, who ultimately will get exchange traded funds that provide very cheap access to various points in the yield curve. Not so long ago we would have not liked this point in the curve, but we feel rates are about to peak here:

It is interesting to note that currently the 4-month point has the highest yield, followed by the 3-month and 6-month nodes. We feel the front end is going to go up to a maximum of 5.25%, so we are quite close.

This fund is a bit on the cusp when benchmarked to just buying treasuries outright for a retail investor. But given the cheapness of the structure (only 3 bps) we feel it makes sense. Also this name stands out if investors think we are going to see the Fed lower rates in 2024. With a duration slightly higher than ( BIL ) and ( SGOV ), the name will preserve a little longer higher front end yields.

Analytics

The fund aims for a very low duration:

Given its target holdings (i.e. Treasury notes and T-bills with 6 months or less maturity profiles) the vehicle will always have a low duration. The fund has a 4.56% 30-day SEC yield which will keep increasing if rates stay here. As the current collateral matures the fund will buy new 'on-the-run' 6-months T-bills with the current 5.059% yield.

An investor can certainly just roll 6-month treasuries in their own account but this fund is extremely cheap, charging just 0.03%. Given its low duration the fund has a very stable NAV:

The NAV will hover around $50/share by design. Given its low duration it will always flush out quickly capital gains and losses as it rolls into new holdings.

The fund currently holds only T-bills:

Where are front yields going?

The current futures pricing gives us a maximum 5.25% Fed Funds pricing:

Obviously the market trades every day and things can change based on CPI numbers and other economic indicators, but we feel the 5% to 5.5% range is the correct one to consider.

Given where 6-month yields are currently that would mean there is very little left in terms of increase in yields here. This point in the curve looks good for us in terms of clipping a nice yield without any downside implications from duration.

There is also the issue around the debt ceiling , which can further distort the front end:

We can see the 1-month being bid up (i.e. rates lower), as people are trying to avoid what happens 'after' the expiration of the debt ceiling date. The differential between the 1-month rate and the 6-month one is the highest in the past decade.

Conclusion

The BondBloxx Bloomberg Six Month Target Duration US Treasury ETF is a new exchange traded fund. The vehicle launched late in 2022 and aims to track the total return of six months treasuries. The fund has a low duration of approximately 0.47 years and rebalances monthly. Expect a stable NAV of around $50/share here and a dividend yield that is close to the one exhibited by 6-months treasuries. Since rates have risen, the current 30-day SEC yield has a bit more 'catching-up' to do, currently yielding only 4.56% versus 5.05% for 6-months treasuries. Every month, as the fund rebalances we are going to move closer to that target. Given where we are in the monetary tightening cycle and peak rates (which we estimate to be in the 5% to 5.5% range), XHLF is a good cash parking vehicle. That means that despite its higher duration (versus the likes of BIL or SGOV), the fund will not suffer any negative NAV impact since rates are very close to their expected peak.

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