Investors have been flocking to long-term Treasuries and related exchange traded funds (ETFs) as a haven from the uncertainties of the euro debt crisis. As a result, long-term Treasuries have outperformed all other fixed-income securities for the year. But can the rally be sustained?
According to Min Zeng of The Wall Street Journal, long-term Treasuries posted an 8.72% return this year through Thursday, reversing last year’s 21.4% loss. Mid-term Treasuries maturing in 10 to 20 years gained 7.36% after losing 8.12% last year.
Van Hoisington of Hoisington Investment Management Co. said, “Long-dated Treasuries are my favorite.” [Picking and Choosing From Treasury ETFs.]
Fears about the euro debt crisis and the effects it will have on global economic growth have helped buoy Treasuries. In addition, the United State’s “high unemployment rate and the still high level of unused capacity in the economy overall” has cooled fears of inflation for the time being. [Corporate Bond ETFs in Favor.]
In the first quarter, belief in a sustainable economic recovery led to more equity investments and fueled fears of inflation, resulting in the 10-year note’s yield breaking above 4% for the first time since October 2008.
By late April, that momentum was shattered in the wake of the euro zone fiscal fallout. Investors poured money into U.S. government debt, pushing yields to 3.059%, the lowest since April 2009. [What You Should Know About Bond ETFs.]
Jeff Given, a portfolio manager with MFC Global Investment Management, thinks the 10-year yield may test 3 percent, indicating a bullish bet on Treasury prices. He reasons that “investors are still skittish about what is going on in Europe… equity markets are likely to be fairly volatile [and]inflation is a story a couple of years out.”
The annualized core CPI in April was 0.9% while the yield gap between 10-year TIPS and Treasury notes shrunk to 1.83% in late May, down from 2.47% in January. These indicators seem to signal that the Treasury rally may still have legs yet. Use a trend-following discipline if you’re interested in these funds, though. [How to Follow the Trends.]
For more stories on Treasurys, visit our Treasury category.
- iShares Barclays 10-20 Year Treasury Bond (NYSEArca: TLH)
- PIMCO 25+ Year Zero Coupon U.S. Treasury (NYSEArca: ZROZ)
- PowerShares 1-30 Treasury Ladder (NYSEArca: PLW)
Sumin Kim contributed to this article.