With almost half of the world government bonds yields below 1%, U.S. Treasury bonds and U.S. dollar exchange traded funds could continue to pick up as the economy expands.
“The bond market is in a fix now,” John Anderson, a portfolio manager at Smith & Williamson Investment Management, said in a Bloomberg article. “If U.S. growth does pick up, current low yields will look unsustainable. But euro-zone deflation could mean any correction could be a long way off. We stay long Treasuries and the dollar for the time being.”
Investors who are interested in staying long U.S. Treasuries and the U.S. dollar can stick to the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) and PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP). [Treasury ETFs Soar in August]
IEF tracks a basket of intermediate-term U.S. Treasury bonds, with a 7.72 year effective duration and a 2.10% 30-day SEC yield. UUP follows the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
About 45% of all government bond yields less than 1%, according to Bank of America. For instance, benchmark 10-year German bund yields are at 0.97% and 10-year Japanese government bond yields are at 0.53%.
In comparison, yields on benchmark 10-year Treasuries are hovering around 2.45%.
Foreign central banks, notably the European Central Bank and the Bank of Japan, are implementing loose monetary policies and quantitative easing to combat deflationary pressures and a stagnate economy.
The loose policies have weighed on the countries’ respective currencies and yields. Consequently, foreign investors could turn to other countries, like the U.S., for more attractive yield-generating assets. The potentially greater demand for U.S. Treasuries will help support prices push down Treasury yields. Bolstering the greenback, foreign investors will also raise demand for U.S. dollars to purchase USD-denominated assets. [Keep Tabs on These Currency ETFs]
Additionally, U.S. dollar will continue to strengthen as the Federal Reserve is more likely to hike rates sooner than the Eurozone or Japan. However, PIMCO argues that rate hikes may be more tempered due to the relatively slow growth environment.
“No one’s talking about rate hikes in Europe for several years,” Richard Clarida, an official at Pimco, said in the article. “Japan is still in an easing cycle. Globally, while the Fed and the Bank of England may start to move in 2015, it’s not going to be your father’s or your uncle’s rate-hike cycle.”
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.