In anticipation of potential changes to the Federal Reserve’s monetary policy, investors are shifting out of their short-term Treasury allocations and are moving over to longer-dated securities.
“People are prepared for eventual tightening monetary policy from the Fed,” Mary Ann Hurley, vice president of trading at D.A. Davidson & Co., said in a Bloomberg article.
The iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY), Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) and Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH) have slightly weakened since Fed chair Janet Yellen gave her statement to lawmakers, but the funds remained flat over the past week.
Yields on short-term Treasury notes are sensitive to interest-rate outlook and have been pressured since Fed chair Janet Yellen signaled that rates could rise sooner-than-anticipated if the labor market continues to improve at a faster clip.
If the economic data strengthens at a faster-than-expected pace, rate hike expectations will push up two-year note yields, or weigh on short-term Treasury prices.
The two-year note’s yield touched 0.536% last week, the highest since September, while the three-year note’s yield briefly crossed 1%, the first time since 2011.
Meanwhile, longer-dated Treasuries have been strengthening, with the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) up 0.1% over the past week and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) 0.3% higher. Year-to-date, TLT increased 12.5% and EDV gained 19.3%.
Treasury bonds have also attracted strong international interest. In May, foreigners acquired over $19 billion in U.S. long-term securities, with Japan purchasing $10.4 billion and China buying $7.7 billion, Reuters reports.
“Foreign investors looking around the globe at where they can put money to work look at the U.S. as a good credit and the yields are actually better than elsewhere,” Thomas Simons, a government-debt economist in New York at Jefferies LLC, said in a Bloomberg article. “It makes sense to put money to work here. I don’t think that’s going to change given the global outlook.”
For more information on Treasuries, visit our Treasury bonds category.
Max Chen contributed to this article.