Investing in Treasury Bills in a Falling Rate Environment

In the shadow of a slowing labor market and evolving inflation dynamics, the Federal Reserve's anticipated rate-cutting cycle has sparked renewed interest in short-term fixed-income strategies. Treasury Bills (TBILs), with their unique combination of guaranteed returns, stable maturity timelines, and minimal duration risk, are emerging as a compelling alternative to long-term bond ETFs like the Vanguard Total Bond Market ETF (BND) and the iShares 20+ Year Treasury Bond ETF (TLT). As yields on TBILs decline in anticipation of lower rates, investors are presented with a strategic window to secure current yields before they erode further.

The Yield Dilemma: TBILs vs. Long-Term Bonds

Recent data underscores the shifting landscape. The 3-month TBIL yield has fallen to 4.01% as of September 2025, a 22-basis-point drop over the past month. Similarly, the 6-month and 12-month TBIL yields have declined by 25 and 28 basis points, respectively. While these yields lag slightly behind the 4.25% 30-day SEC yield of BND and the 4.37% trailing yield of TLT, the gap is narrowing. Crucially, TBILs offer a guaranteed return at a discount to face value, ensuring investors avoid the price volatility inherent in long-term bonds.

Long-term bond ETFs, by contrast, face a paradox in a falling rate environment. While their prices typically rise when rates decline, their yields remain fixed at issuance. For example, TLT's 4.37% yield reflects historical cash flows, not current market conditions. If the Fed cuts rates as projected, newly issued bonds will carry lower coupons, making existing long-term bonds less attractive. This dynamic creates a risk-reward imbalance: investors in BND or TLT must tolerate duration risk to capture modest yield advantages that may soon vanish.

Duration Risk: The Hidden Cost of Long-Term Bonds

Duration, a measure of a bond's sensitivity to interest rate changes, is where TBILs gain a decisive edge. Treasury Bills, with maturities of one year or less, have durations nearly equal to their time to maturity. This means their prices are virtually immune to rate fluctuations. For instance, a 3-month TBIL's price will not meaningfully change if the Fed cuts rates by 50 basis points tomorrow.

Long-term bonds, however, are far more vulnerable. The iShares 20+ Year Treasury Bond ETF (TLT), which focuses on ultra-long Treasuries, has a duration likely exceeding 15 years. A 1% rate increase would theoretically reduce TLT's price by approximately 15%, while a rate cut could boost it by the same margin. Yet, this volatility is a double-edged sword. If rates rise unexpectedly—a scenario still plausible in a fragile economic environment—TLT's price could plummet, eroding capital gains. Meanwhile, BND, with its intermediate-duration portfolio of investment-grade bonds, offers less extreme sensitivity but still carries meaningful risk compared to TBILs.

Strategic Case for Shifting to TBILs

The case for TBILs becomes even stronger when considering the Fed's projected rate cuts. As of September 2025, the central bank is widely expected to reduce rates in response to cooling inflation and a softening labor market. Historically, rate cuts have led to immediate yield declines on short-term instruments. For example, the 3-month TBIL yield has already fallen from 4.96% a year earlier to 4.01%, a trend likely to accelerate.

Investors who lock in current TBIL yields now will effectively “capture” the pre-cut rate environment. Consider a $1 million portfolio: purchasing 3-month TBILs at 4.01% secures a risk-free return of $10,025 over 90 days. In contrast, holding TLT or BND exposes the same capital to potential losses if rates rise or if the Fed's easing cycle proves insufficient to offset inflationary pressures.

Moreover, TBILs offer unparalleled liquidity. With maturities as short as four weeks, investors can reinvest proceeds at higher yields as the rate-cut cycle unfolds. This flexibility is absent in long-term bonds, where investors are effectively “locked in” to current yields for years.

Conclusion: A Prudent Reallocation

As the Fed's rate-cutting window opens, Treasury Bills present a rare combination of safety, yield, and strategic flexibility. While long-term bond ETFs like BND and TLT may offer marginally higher current yields, their duration risk and inflexibility make them less attractive in a falling rate environment. For investors seeking to preserve capital while capitalizing on near-term yields, TBILs are not just a defensive play—they are a proactive strategy.

The time to act is now. With TBIL yields already trending downward, delaying a reallocation risks missing the last opportunity to secure current rates before they fall further.