It has been a rocky start to 2013 for Treasury bond ETFs. For example, iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) couldn’t catch a bid Monday morning even though U.S. stock opened to the downside.
The bond ETF has shed about 4% the past week in the aftermath of the U.S. fiscal cliff deal. Treasury yields also moved up last week after the latest Federal Reserve meeting minutes revealed some officials are worried about the impact of the central bank’s bond-buying programs. There is speculation the Fed could even stop purchasing Treasuries as soon as this year. [Treasury Bond ETFs Still Falling After Jobs Report]
“After three decades of declines, interest rates are near rock bottom, and many Wall Street experts think the bond bubble may be about to burst,” CNNMoney reports. [Risk On: Treasury ETFs Fall More After Fiscal Cliff Agreement]
TLT, the long-term Treasury ETF, has a three-year annualized return of 13.6%, according to Morningstar. The bond fund has outpaced the annualized gain of 11.2% over SPDR S&P 500 ETF (NYSEArca: SPY) over the same period.
The Treasury fund lagged the S&P 500 last year after soaring 34% in 2011. U.S. government debt funds have benefitted from extremely low bond yields due to demand for safe havens in recent years and the Fed’s Treasury purchases. The Fed has pledged to keep short-term interest rates near zero until at least 2015.
‘Global thirst for yield’
“Like it’s been in the case of Japan, low interest rates can go on much longer than expected, but right now it seems that all the stars are aligned for interest rates to rise,” said Jeff Weniger, senior investment analyst at BMO Private Bank, in the CNNMoney report. “But ultimately, whether it happens in 2013, 2014 or 2015 doesn’t matter too much. What matters is that you’re not invested in bonds when they do rise.”
Bond prices and yields move in opposite directions. There is concern that investors who have flooded into bond funds and ETFs will get hurt when rates eventually rise. Still, Treasury yields remain stubbornly low by historical standards despite the recent bounce.
Outside of Treasuries, other bond ETF categories such as high-yield corporates enjoyed a solid 2012.