Despite record low yields, Treasuries are still in high demand. Future uncertainty, lackluster economic data and weakness in the equity markets is pushing investors to the safety of bonds and related exchange traded funds (ETFs).
Recently, the Federal Reserve Chairman Ben Bernanke stated that the economy is facing “unusually uncertain” prospects, which may keep inflation and interest rates suppressed for a while, according to Investors. Long-term bonds rose quickly after bond traders were betting on long-date issues doing better than short-term bonds in a low-growth and low-inflation environment. [5 Bond ETFs for a Low-Interest-Rate Environment.]
The benchmark 10-year note’s yield traded at 2.88% on Tuesday. The 10-year yield is almost at a 15-month low of 2.855% while the two-year yield hit a record low of 0.556%. [The Appeal of Treasury Bond ETFs.]
The investors are constantly “overshooting” or “undershooting” a market on good or bad news, remarks Gary Gordon for ETF Expert. Currently, the Treasury bond price gains have “overshot,” Gordon opines. Prices are in deflationary territory as opposed to low-inflation, modest-growth, mild-recession economic stagnation. Basically, prices can’t get any higher, and eventually, bond prices will fall and yields will rise, says Gordon.
Inflation is crawling at a annualized rate of about 1%, consumers aren’t spending as much as they use to and the housing market is in a slump, writes Ron Rowland for Money and Markets. All of these negative bits of reality may actually provide a great short-term opportunity.
Rowland points out that long-term bond ETFs may be a good play on the diminishing short-term yields. Bond prices rise when interest rate falls, and the impact is magnified in long-term bonds.
- iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT)
- Vanguard Extended Duration Treasury ETF (NYSEArca: EDV)
- Direxion Daily 30 Year Treasury Bull 3X Shares (NYSEArca: TMF)
For more information on bonds, visit our bond ETFs 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.