Federal Reserve Bank Is Buying T-Bills And You Should Too – iShares Short Treasury Bond ETF (NASDAQ:SHV)

The Dow Jones Industrial Average hits an all new high at 29,000, and the Federal Reserve Bank hits the buy button on more short-term treasury bills within the repo market. The Federal Reserve has been conducting these repo offerings and treasury bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves. Just last week, the Federal Reserve decided that they would continue on with the repo purchases at roughly $60 billion a month until February. The latest move extends a repo program that has been in place since it stepped into the repo market this fall, but indicates the central bank is wanting to exit the program this winter. Until recently, banks had more than enough capital reserves to fulfill their needs for cash and regulatory requirements. We all know on Wall Street it is much easier to start a program like this than it is to exit.

What Is Repo, Anyway?

Before we start talking about what to buy, we need to understand what the repo market is. According to Investopedia, a repurchase agreement is a short-term agreement to sell securities in order to buy them back at a slightly higher price. The Federal Reserve Bank enters into the repo market to regulate the money supply and bank reserves.

(Source: WSJ)

Institutions, hedge funds, and banks use this market to finance the purchase of other debt securities and other investments. After the 2008 Great Financial Crisis, investors were focused on a particular type of repo, known as repo 105. Speculation on Wall Street rose around these type of repos. Many financial crisis experts believed they could have played a part in Lehman Brothers’ attempt to hide the bank’s declining financial health leading up to the financial crisis. Now, institutional and individual investors are wondering if the same thing is happening again.

Buying Short-Term Treasuries Like The Fed

First and foremost, investors should thoroughly review where they are investing short-term cash. I don’t believe if financial conditions were so spectacular, the Fed would be in the repo market at a rate of $60 billion in any week. Dallas Fed President Robert Kaplan said this recent move to buy more T-bills is having some effect on risk assets. In his Monday Bloomberg TV interview, Mr. Kaplan stated:

It’s a derivative of QE when we buy more bills and inject more liquidity.

The Federal Reserve is expanding their balance sheet through the purchase of short-term treasury bills. I’m a believer that investors should not fight the Fed, and read between the lines in what they are communicating to investors. Essentially, by purchasing more bills, they are calming the repo market and ensuring stability within markets. Investors should increase their allocation to short-term treasury bills as a way to hedge portfolios and a way to keep capital safe.

The iShares Short Treasury Bond ETF

In 2018 and part of 2019, I recommended investors allocate their short-term capital to short-term treasury bills as the Fed was raising the fed funds rate. Since last year, the iShares Short Treasury Bond ETF (SHV) has provided safety of principal and steady monthly dividends.

2019 1 0.24%
2019 2 0.16%
2019 3 0.22%
2019 4 0.19%
2019 5 0.24%
2019 6 0.24%
2019 7 0.16%
2019 8 0.23%
2019 9 0.14%
2019 10 0.27%
2019 11 0.07%
2019 12 0.17%

(Source: Portfolio Visualizer)

According to iShares, the SHV seeks to track the investment results of an index composed of U.S. treasury bonds with remaining maturities between one month and one year.

Type Fund

0 – 1 Years


2 – 3 Years


Cash and Derivatives


(Source: iShares)

SHV’s yield has dropped from over 2.4% last year to 1.5% this year, as the Fed continues to lower the short-term fed funds rate. However, I remember when this fund hardly paid anything in interest. Owning SHV is a way to protect cash and earn interest through treasuries. In 2008, the SHV earned 2.8%, while the S&P 500 (SPY) dropped over -36.8%. With over $21 billion in assets, there is plenty of liquidity. When you look at the assets under management measurement growth rate, you can see investors are becoming more nervous by purchasing more SHV:

ChartData by YCharts

As the Federal Reserve raised rates in 2018, investors added capital to SHV, and in a hurry. Assets grew over 416% over the past few years for SHV, as investors are fine earning a little more interest. Indeed, this move by the Fed is taking capital out of other assets, even though stocks and other riskier assets have hit new highs. I believe there is a real chance the Fed could shock markets and raise rates this year, in a way to slow down equity prices. This would benefit those who own SHV as well. At a cost of only 15 basis points, this is an easy way to protect short-term cash, and not having to take the time to buy individual bills through Treasury direct. Having liquidity of a $21 billion ETF in your portfolio is great as well.

Current Risk Metrics

Any article I do on a mutual fund or ETF, I always run the risk metrics. For SHV, the risk metrics are pretty easy to explain. Volatility is non-existent and the max-drawdown of the fund was 12 basis points.

Metric SHV
Arithmetic Mean (monthly) 0.06%
Arithmetic Mean (annualized) 0.70%
Geometric Mean (monthly) 0.06%
Geometric Mean (annualized) 0.69%
Volatility (monthly) 0.10%
Volatility (annualized) 0.35%
Downside Deviation (monthly) 0.01%
Max. Drawdown -0.12%
US Market Correlation -0.24
Beta(*) -0.01
Alpha (annualized) 0.75%
R2 5.54%
Sharpe Ratio 0.42
Upside Capture Ratio (%) 1.35
Positive Periods 96 out of 144 (66.67%)
Gain/Loss Ratio 5.57

(Source: Portfolio Visualizer)

If you are looking for a short-term ETF for cash positions, this is one of the least volatile and conservative funds one could purchase. SHV has a negative U.S. market correlation along with a negative beta. This will serve well as a hedge for your equity positions as well.


Illiquidity in the U.S. repo markets could be the one catalyst that spooks investors in 2020. Purchasing short-term treasuries with SHV is a way investors could hedge their positions and buy what the Federal Reserve Bank is buying. Another outcome many investors are not weighing is a Fed that could actually raises rates. If they do, SHV will pay more in monthly dividends, and if they don’t, monthly dividends stay the same or decrease. With equity markets at new highs, and problems with the repo market still in existence, it would be prudent to raise cash and consider a short-term treasury bond fund like SHV. You can find more info here along with the iShares SHV prospectus at iShares.com.

Disclosure: I am/we are long SHV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The above statements are opinions of Mr. Josh Ortner, CTFA, and should not be construed as personal financial advice.

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