Treasury bills and short-term bond funds are not the same cash

explainerPublished 19 October 20262 min readfixed income

Key points

• Cash-like is a description of duration and credit, not a word on a fund’s marketing page.
• A yield advantage of a few tenths of a percentage point can be smaller than a one-day price move if duration or spread is longer than it looks.
• The comparison below is hypothetical. It is not a Treasury auction and not a fund yield.

What is going on

Bills mature in months. Their prices move little when yields change because the cash is near. A fund that also holds notes out to two or three years, or investment-grade credit, has more price risk and may have spread risk. The investor owns shares in the fund, not a claim on the Treasury. The share price can differ from a bill’s price on the same day. An expense ratio reduces the yield the holder keeps.

Why it matters

Suppose a bill-like holding yields 4.0 percent and a fund’s distribution yield is 4.4 percent, a gap of 0.4 percentage points over a year. Suppose the fund has a modified duration of 2. A yield rise of 0.5 percentage points is an approximate price change of minus 1 percent, using the duration rule. Over a short holding period that price move is larger than the extra yield earned in a quarter of a year, which would be about 0.1 percentage point. The fund was not a worse or better investment in general. It was a different risk. These yields and the duration were chosen for the arithmetic.

What to watch

Read the maturity breakdown, the credit breakdown and the ongoing charge. Yield-to-maturity, a distribution yield and an SEC-style yield answer different questions. Do not treat them as synonyms. This site does not stream Treasury prices.

Risks

A government bill can still be a poor holding if inflation is higher than the yield, or if the investor needed a long lock-in. A fund can gate or swing its price in stress even when the word ‘short’ is in the name. Floating-rate corporate debt inside a ‘cash’ fund is a credit position.