Treasury ETFs and the Supercommittee Deadline

November 14th at 11:54am by Tom Lydon

The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) was up 1.3% on Monday after the Federal Reserve bought Treasuries and on lingering worries surrounding Eurozone debt.

Treasury 30-year bonds rose for the first time in three days after the Fed purchased about $2.54 billion of Treasuries as part of “Operation Twist,” Bloomberg reported Monday. The central bank has been buying long-term bonds in a bid to lower borrowing costs. Bond prices and yields move in opposite directions.

“Markets are very nervous even with the news out of Europe,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, in the article. “There are still questions on where this is taking us and a lot of people are afraid.”

Stock exchange traded funds were lower Monday as the long-term Treasury ETF gained ground.

While the market’s attention has been solely fixed on Europe, back in the U.S., a “supercommittee” will begin crafting an agreement on lessening the country’s debt. [Stock ETFs Eye Supercommittee]

The group of 12 U.S. lawmakers will need to carve out $1.2 trillion in deficit reductions by the Nov. 23 deadline. If the group fails to reach an agreement, the deadline will trigger cuts across the board, writes Cynthia Lin for WSJ.com.

Ahead of the new debt plan, 10-year Treasury yields have already dropped down 24 basis points over the last two weeks as prices rose.

During the summer, money managers were selling August T-bills that were at risk of defaulting, sending Treasury bonds reeling, as Congress dragged its feet until the last minute in deciding to lift the debt ceiling. If the supercommittee comes to an uninspiring agreement, U.S. Treasuries may begin to lose its appeal as a safe source of debt.

Consequently, foreign traders will reduce their demand for the U.S. dollar in conjunction with U.S. Treasuries. Additionally, some analysts believe that a lackluster resolution may also force the central bank to offer further stimulus aid, which will also negatively affect the greenback.

However, despite potential misgivings on U.S. debt, Steven Hess, Moody’s lead analyst for the United States, argues that demand will remain strong for Treasury bonds and, by extension, the U.S. dollar because of their dominant role in the global markets, report Tim Reid and Andrew Quinn for Reuters.

“The dollar is the preferred storer of value. As a global benchmark, the U.S. Treasury is unrivaled. We don’t see that changing any time soon,” Hess said in the Reuters article.

Moody’s will wait until 2013 before making a decision on the U.S. credit rating after analyzing multiple factors, including next year’s election and the 2013 budget, even if the sueprcommittee fails to reach a deal on Nov. 23.

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.

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