U.S. Treasuries tumbled earlier this year after the market predicted an imminent change to Federal Reserve policy. However, investors are taking a second look at bond exchange traded funds as economic strength falters and Fed tapering is pushed to the back burner.
“The idea that we have very strong growth and that they’re trying to have a meaningful reduction in monetary policy accommodation, that hypothesis is looking very damaged,” Dominic Konstam, global head of interest-rate research at Deutsche Bank, said in a Bloomberg article. “The economy isn’t growing as strongly as we’d hoped.”
Treasury bond exchange traded funds, like the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), are breaking out after Fed tapering speculation pushed yields higher earlier this year – yields and bond prices have an inverse relationship, so an increase in yields corresponds with a decline in prices. TLT has gained 1.6% over the past three months but declined 10.3% year-to-date after yields on 30-year notes climbed from the May low of 2.828% to a peak of 3.902% in August. [Bond ETFs Breaking Out]
However, retail sales and jobs growth stumble. Moreover, the recent government shutdown revealed the country’s ongoing fiscal woes.
“The uncertainty generated by that shutdown is likely to be enough to keep the Fed’s position on tapering on hold for longer,” Jake Lowery, a money manager at ING U.S. Investment Management, said in the article.
Consequently, Deutsche Bank, ING Groep NV and SEI Investments, among others, have boosted holdings of Treasuries since September as growth prospects weakened. According to Stone & McCarthy Research Associates, the proportion of U.S. government debt held by money managers rose in the week ended Oct. 29 from the lowest point since June 2012.
The 30-year Treasury yields currently sit around 3.691% and benchmark 10-year Treasury yields are at 2.6%, down 0.37 percentage points since the Sept. 5 high. Deutsche Bank predicts 10-year yields could end the year at 2.25%.
Other Treasury bond ETFs include:
- iShares 10-20 Year Treasury Bond ETF (NYSEArca: TLH): up 2.1% over the past three months
- iShares 7-10 Year Treasury Bond Fund (NYSEArca: IEF): up 1.5% over the past three months
- iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI): up 1.1% over the past three months
- Schwab Intermediate-Term U.S. Treasury ETF (NYSEArca: SCHR): up 1.2% over the past three months
- SPDR Barclays Capital Intermediate Term Treasury ETF (NYSEArca: ITE): up 0.8% over the past three months
- Vanguard Extended Duration Treasury ETF (NYSEArca: EDV): up 1.7% over the past three months
For more information on the bonds market, visit our bond ETFs category.
Max Chen contributed to this article.
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.