Treasury exchange traded funds are making a comeback as benchmark yields experience the largest monthly drop since August 2011.
The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has gained 7.6% year-to-date while iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) rose 3.6%.
Benchmark 10-year Treasury yields dipped to 2.64% on the last day of January from 3.03% at at the end of 2013, Bloomberg reports. The last time we saw a similar drop was when Standard & Poor’s downgraded the U.S. from its triple-A credit rating.
The 10-year Treasury bond yield is now hovering around 2.63%, or more than a two-month low.
Bond prices and yields have an inverse relationship. Additionally, bond funds with longer durations are more sensitive to changes in rates, so a rise or fall in yields is magnified in long-term debt, compared to short-term bonds.
Investors dumped fixed-income in favor of equities over the past year as Fed tapering and an improving economy fueled a risk-on environment. However, the risk-on sentiment quickly soured in January as problems in the emerging markets and softening U.S. economic data sent investors into the safety of bonds. [Bond ETFs See Best Start Since ’08]
The move into safety and quality has benefited Treasury bonds. Hedge funds and other large speculators have decreased bets against the 10-year Treasuries to as low as 58,000 contracts in January from a 19-month high of 189,000 in November.