Exchange traded funds that invest in Treasury bonds are caught between two powerful crosscurrents in the markets.
Although investors hear a lot about the debt ceiling and the U.S. budget deficit, Treasury yields have actually been falling recently, meaning bond prices are rising. This suggests demand for Treasuries, which are seen as a safe haven in times of market stress.
For example, iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) surged in late 2008 as the worst of the credit crisis shook markets.
There are powerful arguments against owning Treasury ETFs now, though, and many high-profile investors are bearish on government debt.
For example, Reuters recently reported that with the national debt at $14.3 trillion, this amount piled in $1 bills would reach to the moon and back. Twice.
Some commentators say it’s only a matter of time until the “bond vigilantes” turn on the U.S. government debt market and demand higher yields. Additionally, rising inflation is a killer for bond prices as purchasing power erodes.
Despite these concerns, iShares Barclays 20+ Year Treasury Bond Fund is in positive territory so far this year with a gain of more than 3%. [Treasury ETFs Still Waiting for Higher Rates]