how much principal will SHY lose in economic recovery?

[atrchi]

I'm thinking here of two common scenarios -
- 2000- & 2006- like recovery, where short term rates went to 6%
- 1981-, 1947-, and 1917- like recovery, short term rates @ 17%

In these scenarios would SHY lose 9% and 25.5% of principal value respectively?

I'm just a bit puzzled why so many smart folks consider SHY to be as good as MMF & 3-month T-Bills.

Please enlighten me.

Thanks

[craigr]

I'm thinking here of two common scenarios -
- 2000- & 2006- like recovery, where short term rates went to 6%
- 1981-, 1947-, and 1917- like recovery, short term rates @ 17%

In these scenarios would SHY lose 9% and 25.5% of principal value respectively?

It's not so linear. Duration shortens as interest rates rise so the impact on rising rates decreases as they go up. Also the funds will take a hit to NAV at first, but as the older holdings rotate out and new ones in as they mature the NAV will recover.

This is why I point out that the SHY option is just that, an option. I don't recommend people do it if they don't have at least a year's living expenses in cash treasury money market first. In the event of interest rates rising you need to be able to ride out the initial hit as the fund recovers. You can do that with a year's cash  tucked away in the safer option.

However again, this SHY mod is optional. There is nothing at all wrong with just sticking to a high quality Treasury money market and just calling it a day.

[Ad Orientem]

atrchi
Your second set of dates had unusual background which acted as contributing factors to the sharp spike in rates.

1981 was not a recovery year.  It was the year the FED finally decided to act decisively against the then rampant inflation and jacked interest rates hugely.

1947 was the year that the US largely began to abandon it's war time rationing regimen and we saw a lot of inflation.

1917 was the year the US entered the First World War.  Most investors were acutely aware of the devastation the war had inflicted on the finances of the major powers in Europe and feared similar effects here.  Also we abandoned the gold standard for the duration of the war.

That said you are right to remember that "near cash" is not the same as cash.  SHY and similarly dated T-Bill funds are low risk but not no risk.  Either keep a large reserve in the bank as per Craig's suggestion or I would stick to SHV or maybe even BIL where your interest rate sensitivity is MUCH lower.