Exchange traded funds that target U.S. Treasury bonds, which many investors use to steady their portfolios, have seen volatility ratchet higher this week with swings of more than 1% the past two days as markets look for resolution on the debt ceiling.
The long end of the Treasury yield curve has seen the biggest twists and turns this week as traders hang on every headline about the U.S debt limit.
A plan from the so-called Gang of Six senators that would cut the deficit by nearly $4 trillion may provide the framework for breaking the political deadlock over the nation’s debt ceiling by the Aug. 2 deadline, Reuters reported.
The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) was down 1.3% on Wednesday after soaring about 2% the previous session. [Gold ETFs Fall, Treasuries Rise on Debt Plan Hopes]
Treasury ETFs spiked in late 2008 and early 2009 as the worst of the credit crisis tore through financial markets. They also rose in 2010 as the economy faltered before the Federal Reserve announced its second round of quantitative easing.
Now in 2011, Treasury ETFs have been trending higher since February as yields fall. Bond prices and yields move in opposite directions.
Yet Treasury ETFs have seen volatility kick higher in recent weeks. They fell sharply at the end of June as the Fed’s QE2 program expired, only to bounce back and rally through the first half of July.
The iShares Barclays 20+ Year Treasury Bond has bounced within a range recently, looking for its next big move.
Treasury ETFs are being buffeted by the inflation/deflation debate, concerns over Europe’s sovereign bond crisis and uncertainty surrounding the U.S. debt limit.
“Despite the absence of credit risk, this fund and the underlying index are highly exposed to interest-rate and inflation risk because of its long duration,” Morningstar analyst Timothy Strauts wrote in a profile of iShares Barclays 20+ Year Treasury Bond.
“That is, if inflation or the real rate of return demanded by the market rise, the price on this fund will drop until the yield is high enough to reflect the current market sentiment,” he said. “Conversely, in times of market turmoil, the value of this fund should rise as investors flock to safety.”
The ETF is sitting near its 50-day moving average.
iShares Barclays 20+ Year Treasury Bond
Chart source: StockCharts.com.