essays pieces of the puzzle
Friday, October 14th, 2011
the short end

Interest rates on Treasuries have been declining for thirty years.  The chart above includes the last bit of that period and shows the yields on the short end of the curve.  With savers looking for whatever income they can find, the investment industry is busy creating and marketing all manner of products to meet the demand.

The bottom panel shows the return since inception of one such vehicle, the PIMCO Enhanced Short Maturity Strategy Fund (MINT).  Along with it is the performance of the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) over the same period of time, plus the Citigroup 3-Month Treasury Bill Index, the stated benchmark for MINT.

According to the website, MINT “may be appropriate for non-immediate cash allocations.”  Despite the description and the deceiving benchmark, this is clearly not a “cash” vehicle, as its rise and recent fall show.

Rather than look at the specifics regarding MINT (which is an interesting case study), let’s just say that this is a sign of things to come.  The list of products being sold to those reaching for yield is long indeed, and the money is flooding into them.  They will go wrong in many different ways — and if rates actually ever go up again (I know, it doesn’t seem possible), some will do so in spectacular fashion.  Would-be savers will have received the short end of the stick.  (Chart:  Bloomberg terminal.)