Short-Term Debt ETFs Weakening Ahead of Rising Rate Expectations | ETF Trends

Short-term Treasury bond exchange traded funds have been weakening and dipped below their short-term trendline this month, with yields on 2-year Treasury notes rising to their highest in three years.

Over the past month, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) and Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH) have all declined about 0.2%.

Treasury note yields were inching up as traders began to price in the eventual rate hike next year, Bloomberg. Yields and fixed-income prices have an inverse relationship, so a rising yield corresponds with falling prices. [Bond ETF Strategies for a Rising Rate Environment]

“As the market slowly prices in a potential rate hike, we are creeping up in yield in the front end,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP, said in the article. “If the data continues to hold steady, rate hike expectations will continue to push up the two-year note yield.”

Yields on current 2-year Treasury notes were hovering around 0.46%. However, two-year notes yielded 0.504%, the highest since May 2011, in when-issued trading ahead of Tuesday’s auction.

“There should be decent demand at the auction at these cheaper yields, with quarter-end nearing,” Lederer said. “All across the curve, the market is consolidating — until there is reason to make a big move one way or the other. The Fed is still in easing mode, which caps yields.”