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Wednesday, May 22, 2024

Individual investors now prefer Treasury bills as their go-to investment choice.

As treasury bond yields have continued to rise, it’s worth taking a look at the recent surge and what it means for different types of investors. Today’s yields are at an impressive 5.5%, reminiscent of the time when Destiny’s Child ruled the airwaves and the dotcom bubble was just gaining momentum. This increase in yields has been quite remarkable, and it’s something that investors are taking notice of.

So, what does this mean for the average depositor or investor? Surprisingly, bank depositors are reaping only a fraction of these increases, with the average American savings account yielding a meager 0.45%. Similarly, investors are also missing out. For the first time in over two decades, the return offered by six-month Treasuries has surpassed the earnings yield of S&P 500 companies.

In response to these low rates of return from traditional savings accounts, retail investors are turning to alternative options. Trading platforms have made short-term Treasury products a significant part of their offerings, and one such platform, Public, has seen a spike in demand for Treasuries. In fact, since March, Treasuries have become the most purchased asset on Public, with one in ten new users making them their first trade.

This shift towards high-yielding, safe options extends beyond individual investors to money-market funds, which have seen a surge in inflows. These funds invest in low-risk, short-duration instruments, including Treasuries, and have added over $880 billion in value this year. The total value of money-market funds currently stands at an all-time high of $5.7 trillion, reflecting consumers’ growing preference for liquid, low-risk alternatives to traditional banking products.

This trend, however, has the potential to disrupt the traditional logic of retail banking. Banks have been able to provide low-interest rates on deposits, as many depositors pay little attention to the rates offered. As depositors shift their funds into money-market funds and short-term government debt, banks may face financial instability and increased competition for deposits.

The expansion of retail-trading platforms has made it easier for depositors to access short-term government debt, further eroding the discount on savings rates that banks are able to offer. As a result, Treasuries are expected to become a more significant feature in retail-investment portfolios.

So, it seems that despite the challenging environment for depositors and investors, there are alternative options that offer better returns. It’s clear that there is a growing appetite for safe, high-yielding investments, and this shift has the potential to reshape the traditional banking landscape. As such, it’s essential for depositors and investors to stay informed and consider their options carefully in this changing financial environment.

For more expert analysis of the biggest stories in economics, finance, and markets, remember to check out “Money Talks,” the weekly subscriber-only newsletter from The Economist.

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