The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has fallen sharply in May to test its 52-week low as yields bump higher on upbeat economic data and consumer confidence.
The Treasury ETF is down nearly 7% the past month with yields on the 10-year note rising above 2.1%. Bond prices and yields move in opposite directions.
“Treasurys fell decisively Tuesday as bond investors priced in the possibility that an improving economy, bolstered by strong housing and consumer-confidence data, could push the Federal Reserve to begin winding down its bond purchases,” MarketWatch reports.
Last week, Federal Reserve chief Ben Bernanke and the latest Fed minutes hinted the central bank may soon start tapering its bond purchases, if the economic data justifies such a move.
Treasury yields rose to their highest levels in more than a year on Tuesday while long-dated debt was on track for its worst monthly loss in over three years, according to a Reuters report.
“The market is jittery, any sign of a potential pullback from the Fed or of stronger data and you are going to see a sharp move like we did in the past week,” said Sean Simko, portfolio manager at SEI Investments, in the article. “The path of least resistance is higher yields.”
David Kelly, chief global strategist at JP Morgan Funds, in a note Tuesday reiterated his view that investors should be overweight stocks relative to bonds. He said stocks have been cheap compared to fixed income based on forward earnings yields on the S&P 500.
“The assumptions have been that (1) economic growth would prove strong enough to provide a rising path for earnings, (2) an improving economy would eventually put upward pressure on interest rates, and (3) markets would avoid a destabilizing shock,” Kelly wrote. “Markets could, of course, be hit by some other shock, and investors should remember that fast rising markets limit rather than enhance future returns. For now, however, both facts and reasonable assumptions seem to support a continued overweight to equities over fixed income.”
Investors should continue to find equities more appealing due to relatively low yields in fixed income, according to Boost Research. “Equity dividend and cash-flow yields are not only high by historic standards, but also are high relative to bond yields,” it added. “The relative high and competitive yields offered by equity markets may continue to appeal to investors and sustain the rally further out, in spite of slowing growth expectations.”
iShares 20+ Year Treasury Bond ETF
Full disclosure: Tom Lydon’s clients own TLT.