ETF Trends
ETF Trends

U.S. Treasury exchange traded funds, last year’s hottest ETF investment, tumbled on the first trading session of 2012 as bond prices pulled back and yields on the 10-year note climbed toward 2%.

The iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) dropped nearly 2% on Tuesday. The ETF soared more than 30% in 2011. [Treasury ETFs Lead the Way]

As I explained to Seeking Alpha in a 2012 outlook, I’m not a big fan of Treasuries with yields so low and inflation a real threat to bond investors, among other headwinds.

It seems few investors and advisors are prepared for rising interest rates, and for fixed-income portfolios, I like corporate and emerging market debt much more than U.S. Treasuries. [Five ETF Trends to Watch in 2012]

In a weekly outlook published Tuesday, JP Morgan Funds chief market strategist David Kelly calls out some interesting data points on U.S. stocks and Treasuries for 2011:

  • S&P 500 operating earnings rose by roughly 17%,
  • 10-year Treasury yields fell from 3.3% to 1.9%
  • Core inflation rose from 0.7% year-over-year to 2.2%
  • Investors pulled over $120 billion from equity funds and added over $130 billion to their holdings of bond funds

“With the stock market flat for the year, the valuation pendulum, already at an extreme, stretched to an even greater extreme, with stocks looking extremely cheap relative to Treasuries at the start of 2012,” he wrote, and I can’t disagree.

“Emotionally, it is very easy to give up on the concept of superior equity returns for the long run and succumb to the soothing mantra that bonds will never hurt you. Logically, it has never been more important for investors to take the other side of the trade,” Kelly added.

“Entering 2012, the outlook is foggy with potential upside surprises as well as downside ones. However, financial markets appear priced for the worst of all worlds. Because of this, despite its underperformance in 2011, the case for adding risk or at least achieving balance in 2012 is a good deal stronger than it was a year ago,” the strategist concluded.

iShares Barclays 20+ Year Treasury Bond Fund

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.