- Cash-like Treasurys will offer lower returns as the Fed cuts rates, Bernstein said.
- Investors who pick up longer-dated bonds ahead of time will earn the most.
The risk-averse strategy of piling into Treasury bills will soon lose its allure, and investors who switch into longer-dated bonds now will enjoy the strongest market returns, Bernstein wrote.
While T-bills — which take anywhere from a few weeks to 12 months to mature — have made a sensible passive trade for investors trying to safely take advantage of high rates since 2022, they're already failing to keep up with the broader bond market.
"From October 2022 through December 2023, cumulative returns for the US Treasury Bill 1-3 Month Index were 6.1%, compared with 7.5% for the Bloomberg US Aggregate Bond Index," Bernstein's senior investment strategist Monika Carlson wrote.
Added, rising bets that the Federal Reserve will soon lower interest rates mean that these yields are set to decline. The same can be said for long-term Treasury rates, making it crucial for investors to transition into notes and bonds as soon as possible, the analyst emphasized.
"Historically, in the three months prior to the first Fed rate cut, the yield on the 10-year US Treasury fell an average of 90 basis points. That's why past investors captured the biggest returns when they invested several months prior to the start of the easing cycle," the note said.
For those who invested three months ahead, the average 12-month forward return stood at 13.75%, Bernstein data shows. That's the highest among listed investing timeframes, as those who invested a month prior saw 10.59% returns, while those investing at the first Fed cut achieved 9.91% returns.
Currently, markets and economic commentators have different views as to when the Fed will pivot. Futures swaps data indicate a 50% chance easing will begin in May.
Alternatives outlooks include that of the bond market heavy hitter Jeffrey Gundlach, who has advocated that investors time their Treasury switch for when a recession hits. In his view, the fact short-term and longer-dated yields are de-inverting is evidence of a coming downturn.
Bernstein also noted that it's best to not wait around in cash, as yield erosion can happen immediately and dramatically once the Fed starts easing.
Even in the less likely case that the central bank has to tighten, current high yields make bonds well positioned against potential losses.
"Assuming a parallel shift in rates along the yield curve, a 1% decrease in yields from today's levels suggests double-digit potential returns across much of the bond market, while a 1% increase in yields—an unlikely scenario—suggests modestly negative returns at worst," Carlson wrote.