U.S. Treasury exchange traded funds have been strengthening over the past month on weakness in equities and a recent bout of global volatility, despite a $10 billion taper announced by the Federal Reserve in December. However, Treasuries are taking a break ahead of the next Fed meeting.
The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) and iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) were both flat Tuesday. TLT is now testing its 200-day simple moving average.
Over the past week, TLT has gained 1.2% while IEF rose 0.4%. TLT is up 4.8% over the past month while IEF is 1.9% higher.
Investors anticipate the Fed will announce further tapering to its accommodative measures, which would indicate that the economy is healthy enough to move without the Fed’s assistance.
“The Fed looks set for a further $10 billion reduction” tomorrow, Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd., said in a Bloomberg article. Government bonds “are consolidating after recent gains as risk markets show a modicum of stability. Treasuries look poor value given the improving outlook for the U.S. economy.”
However, Fed tapering has not pushed up rates. Since the Fed announced a $10 billion reduction in its $85 billion per month bond purchasing program on Dec. 18, the benchmark 10-year Treasury yield has declined about 13 basis points to 2.76% from 2.89% – bond prices and yields have an inverse relationship, so a falling Treasury yield corresponds with higher Treasury bond prices.