Treasury, Stock ETFs Diverge as ‘QE2’ Winds Down

June 30th at 1:02pm by John Spence

Stock exchange traded funds are on a roll this week as the SPDR S&P 500 ETF (NYSEArca: SPY) tacked on another 1% in Thursday’s rally.

Conversely, Treasury ETFs have fallen sharply as traders position for the end of so-called QE2, the second round of the Federal Reserve’s quantitative easing program. The Fed’s spree of buying Treasury bonds ends on Thursday, along with the second quarter.

Pimco’s Bill Gross has been calling June 30 a “D-Day” for markets and wondering aloud recently who will step up and buy Treasuries as the Fed program is phased out. Investors nervous about U.S. spending and gridlock in Washington may demand higher yields, which would send bond prices lower.

“Because QE has affected not only interest rates but stock prices and all risk spreads, the withdrawal of nearly $1.5 trillion in annualized check writing may have dramatic consequences in the reverse direction,” Gross wrote in a March investment outlook.

“If on June 30, 2011 … the private sector cannot stand on its own two legs – issuing debt at low yields and narrow credit spreads, creating the jobs necessary to reduce unemployment and instilling global confidence in the sanctity and stability of the U.S. dollar – then the QEs will have been a colossal flop,” Gross added.

The iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) was on a four-day losing streak heading into Thursday’s trading. The ETF was negative but off its session low, trading near its 200-day moving average [Treasury ETF Damage]

ETFs that bet against Treasuries have rallied along with yields. Weak Treasury auctions this week and relief over austerity measures passing in Greece have weighed on bonds. [ETF Spotlight]

“Bond yields and stock prices are resting on an artificial foundation of QE2 credit that may or may not lead to a successful private market handoff and stability in currency and financial markets,” Pimco’s Gross wrote in March.

iShares Barclays 20+ Year Treasury Bond Fund


The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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