The relentless slide in Treasury yields the past three months has been profitable for bond exchange traded funds that invest in U.S. government debt.
Treasury ETFs have performed well on deflation fears and the safe-haven trade as global markets brace for the second Greek election next month that could determine the country’s fate in the euro.
With 10-year note yields hovering around 1.7%, the natural question is how much more can rates drop from already record lows. [Treasury ETF Rally Threatens Stocks]
Hedge funds have been piling into the 30-year Treasury bond, which sets up the possibility of a powerful countertrend rally if markets get any good news on Europe’s debt crisis.
Hedge funds appear to be betting on a drop in interest rates, WSJ.com’s MarketBeat blog reports.
The 30-year bond has produced a total return of 5.5% this year.
“But because of the mechanics of bond investing, it wouldn’t take much of a rise in interest rates to take those gains away,” according to MarketBeat. “That’s because, with yields this low, prices tend to swing wildly with relatively small changes in yields — meaning rates don’t have to increase much to generate sizable bond-price declines. In other words, be careful out there if you’re betting on long-term U.S. Treasurys.”
The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT) is up about 6% the past month.
iShares Barclays 20+ Year Treasury Bond
The opinions and forecasts expressed herein are solely those of John Spence, 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.