With the yield spread on 10-year German bunds against similar maturity U.S. Treasuries at its highest in 15 years, Treasury bond exchange traded funds could find support from European investors who are looking for more attractive income options.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.53 year effective duration, offers a 2.15% 30-day SEC yield and PIMCO 7-15 Year U.S. Treasury Index Fund (NYSEArca: TENZ), which has a 7.82 year duration, has a 2.17% 30-day SEC yield.
Yields on 10-year Treasury notes were hovering around 2.40% Monday while yields on 10-year German bunds were at 0.95%. The difference rose to a little over 145 basis points mid-Monday.
European investors are pushing down German bund yields after European Central Bank governor Mario Draghi hinted at quantitative easing while Federal Reserve chair Janet Yellen reiterated that rates may rise sooner than anticipated, reports Susanne Walker for Bloomberg. [German Bund ETFs Rally on Safe-Haven Demand]
“We don’t see any reason to think the economic situation will converge anytime soon, so the idea that this spread could continue to widen resonates with us,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC, said in the article. “There’s a divergence in the economic and inflation outlooks between the U.S. and Europe.”
Additionally, Treasury bond yield spread over Group of Seven counterparts hit 79 basis points, the most since 2007, after touching a low of 37 basis points in February.
Lyngen argues that investors should buy 30-year bonds and short three- and five-year securities in a flattening trade.
“Any potential catalyst that would lift yields higher, will face headwinds from this flight out of Europe,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC, said in the article. Investors are looking for “superior yields.”