Treasury ETFs Catch Bid on Safety Trade

October 31st at 4:42pm by Tom Lydon

Exchange traded funds that invest in U.S. Treasury bonds rallied Monday on worries over Europe’s debt bailout. Still, Treasury ETFs have posted losses for October as investors turned more upbeat on the global economy.

Conservative investors have thrown billions into Treasury bonds and ETFss so far this year.

The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) was up 3.59% at last check Monday and the iShares Barclays 10-20 Year Treasury Bond Fund (NYSEArca: TLH) was up 2.13%. [ETFs Start Week in Risk-Off Mood]

Over the last 30 years, long-term U.S. debt have added 11.5% per year on average, whereas the S&P 500 saw gains of 10.8% – the last time returns on Treasuries were above equities happened was in 1861, before the Civil War, reports Cordell Eddings for Bloomberg. Fixed-income assets jumped around 6.25% year-to-date compared to the 2.18% increase in the S&P 500.

Low U.S. inflation, the Fed’s decision to keep interest near zero through mid-2013, slower economic expansions and an unusually high savings rate have contributed to bonds growth this year.

“The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Jim Bianco, president of Bianco Research, said in the Bloomberg report. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

However, Treasury yields are already low by historical standards, which could keep a lid on bond prices.

“The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School, said. “If you missed the rally in bonds, well, then that’s it.”

With Treasury yields hovering around record lows and values high, yields will have to eventually go up. Additionally, as the economy recovers and investors take on riskier assets, the move away from Treasuries will also fuel the rise in interest rates.

Investors seeking to bet against the fall in Treasuries and rise in interest rates may take a look at inverse Treasury ETFs such as ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT), ProShares Short 20+ Year Treasury (NYSEArca: TBF) or Direxion Daily 30-Year Treasury Bear 3x Shares (NYSEArca: TMV). [Risk-On Rally Sends Treasury ETFs Into Tailspin]

iShares Barclays 20+ Year Treasury Bond

For more information on U.S. Treasuries, visit our Treasury bonds category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.