2023-03-25 05:54:23 ET
Summary
- SPTI invests in intermediate-term U.S. treasuries.
- The fund has lower capital appreciation potential than other longer duration treasury funds.
- SPTI's yield is also lower than other shorter duration treasury funds and has higher interest rate risk.
Introduction
U.S. Treasuries is considered a haven especially in times of market turmoil. Investors can pick short-term, intermediate term, or long-term treasury funds. Which one is the better one to invest in the current macroeconomic environment? In this article, we will analyze the SPDR Portfolio Intermediate Term Treasury ETF (SPTI) and provide our suggestions.
ETF Overview
SPTI owns a portfolio of intermediate-term U.S. treasuries. While downside risk is likely limited as the Federal Reserve’s rate hike cycle is near an end, a meaningful recovery is not in the horizon either. Given its inferior yield than other short-term treasury funds, and lower capital appreciation potential than other long-term treasury funds, investors may want to seek alternatives elsewhere.
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Fund Analysis
SPTI had a challenging 2022 due to aggressive rate hikes
SPTI had a rough year in 2022. The fund has lost about 9.5% of its value since the beginning of 2022. The decline was primarily due to the Federal Reserve’s aggressive rate hike to tame inflation. Since bond prices usually have an inverse relationship to rates, as rate rises, bond prices will usually decline. Fortunately, we may not be far away from the end of this rate hike cycle. In its latest meeting on March 22, the Federal Reserve raised its rate by 25 basis points and have indicated that this rate hike cycle is near the end. However, the rate will likely be kept elevated throughout the year. The good news is that there is likely little downside risk from this level. However, any meaningful recovery of SPTI’s fund price will likely be a story beyond 2023.
SPTI’s fund price is moderately sensitive to the change in rate
In general, longer duration bonds are much more sensitive to rate changes. In contrast, shorter duration bonds are less sensitive to rate changes. SPTI’s portfolio of treasuries has an average maturity year of about 5.6 years. This intermediate treasury yield means that its fund price is moderately sensitive to the change of rates. As can be seen from the chart below, SPTI’s fund declined by about 13.15% since the peak reached in July 2020. This decline was worse than its shorter duration peer, SPDR Portfolio Short Term Treasury ETF ( SPTS ), which lost about 4.81% of its value. On the other hand, SPTI’s longer duration peer, SPDR Portfolio Long Term Treasury ETF ( SPTL ), lost over 37% of its value.
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If you are seeking higher yield, why not buy short-term treasury instead?
Investors choosing SPTI often wants higher yields than shorter duration bonds and lower interest rate risk than longer duration bonds. However, as the chart below shows, the yield curve has inverted for over half a year already. At the present moment, 6-month treasury offers a yield near 5% which is higher than the 5-year treasury yield of less than 3.6%. Therefore, if reducing rate risk is what investors are concerned with, why not owning shorter duration treasury funds instead? Shorter duration bond funds currently offer better yield and little credit risk and appears to be a better choice than owning intermediate treasury funds.
If you are hoping for more capital gain, you should seek longer duration treasury funds instead
If the primary objective of investing in SPTI is to hope for future capital gain, this is not the best fund to be. To be more specific, the better funds to own are those longer duration treasury funds. As the chart above shows, 20-year treasury yield is also slightly higher than the 5-year treasury yield. More importantly, longer duration funds are much more rate sensitive than SPTI. If the Federal Reserve ends up lowering the rate in the future, longer duration treasury funds such as SPTL will have much more upside potential than SPTI. However, any meaningful capital appreciation will likely be a story beyond 2023 as the Federal Reserve is unlikely to lower the rate this year due to its effort to tame inflation.
Investor Takeaway
SPTI is not attractive in the current macroeconomic environment. Investors whose primary objective is to seek safety should consider short-term treasury funds such as SPTS as the fund has higher yield and lower rate risk. On the other hand, investors with a primary objective to earn capital gain should consider longer duration treasury funds such as SPTL. If the Federal Reserve ever decide to lower the rate in the future, which is likely a story beyond 2023, SPTL should have higher potential than SPTI.
For further details see:
SPTI: Either Short-Term Or Long-Term Treasury Funds Are Better Alternatives