Short-term Treasury bond exchange traded funds have been weakening and dipped below their short-term trendline this month, with yields on 2-year Treasury notes rising to their highest in three years.
Over the past month, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) and Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH) have all declined about 0.2%.
Treasury note yields were inching up as traders began to price in the eventual rate hike next year, Bloomberg. Yields and fixed-income prices have an inverse relationship, so a rising yield corresponds with falling prices. [Bond ETF Strategies for a Rising Rate Environment]
“As the market slowly prices in a potential rate hike, we are creeping up in yield in the front end,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP, said in the article. “If the data continues to hold steady, rate hike expectations will continue to push up the two-year note yield.”
Yields on current 2-year Treasury notes were hovering around 0.46%. However, two-year notes yielded 0.504%, the highest since May 2011, in when-issued trading ahead of Tuesday’s auction.
“There should be decent demand at the auction at these cheaper yields, with quarter-end nearing,” Lederer said. “All across the curve, the market is consolidating — until there is reason to make a big move one way or the other. The Fed is still in easing mode, which caps yields.”
The three ETFs track U.S. Treasuries with remaining maturities between one and three years. SHY has an effective duration of 1.89 years and a 0.26% 30-day SEC yield. SCHO has a 1.97 year duration and a 0.30% 30-day SEC yield. VGSH has a 1.9 year duration and a 0.30% 30-day SEC yield.
Alternatively, investors can bet on weakening 2-year notes through an inverse or bear ETN, the iPath US Treasury 2-year Bear ETN (NYSEArca: DTUS). DTUS is up 2.7% over the past month.
iShares 1-3 Year Treasury Bond ETF
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.