The bond markets have been doing some really interesting things lately, and it’s had an impact on exchange traded funds (ETFs). Low yields on treasuries are saying that investors are still very much scared and looking for safe havens with such fervor that they’re willing to accept the lowest yields in decades.

On Tuesday, investors were dumbstruck by news of Treasury Bills being auctioned off with negative interest rates, writes John Curran for Time Magazine. Corporate and junk bonds are also baffling investors with their unusually high returns of 10% for triple-B rated lower-quality investment-grade corporate bonds and 22% for risky junk bonds. These yields seem to imply at that investors are now expecting one-fifth of these bonds to default.

The news of high returns may help entice investments into corporate and junk bond ETFs such as:

• iShares iBoxx $ Invest Grade Corp Bond (LQD): down 5.2% year-to-date; 6.2% yield
  
• iShares iBoxx $ High Yield Corporate Bond (HYG): down 29.7% year-to-date; 12% yield
  

Although current market conditions should be meticulously looked at, investors are mostly ignoring the long-term effects of inflation due to monetary and fiscal policies that could someday translate to high bond yields.

Low yields in inflation-protected treasuries (TIPS), which includes the ETF iShares Barclays TIPS Bond (TIP) currently down 3.2% year-to-date, indicate investor expectations of deflation for the next few years. It has a 7.8% yield.

The dilemma investors now face is a decision between the relative safety of Treasuries or lucrative yields available in other parts of the market. But it should noted that Treasury bonds are widely viewed as being overvalued, which could incur losses if markets recover next year.

One such Treasury bond ETF to look at depending on ones outlook is iShares Barclays 20+ Year Treas Bond (TLT) which is up 25.7% year-to-date. It has a yield of 3.9%.

Tags: Bond ETFs, High-Yield Bonds, HYG, LQD, TIP, TIPs, TLT, Treasury Bonds