Government bond exchange traded funds jumped Wednesday as benchmark 10-year yields on U.S. Treasuries and municipal debt securities dipped below 2% for the first time in over a year.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.63 year effective duration, was up 0.9% Wednesday while the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 6.35 year duration, was 0.5% higher. Year-to-date, IEF has increased 8.6% and MUB gained 9.1%.
The yields on benchmark 10-year Treasuries fell to as low as 1.858% Wednesday, the lowest intra-day level since may 2013, reports Min Zeng for the Wall Street Journal. Bond prices have an inverse relationship with yields, so a falling yield reflects rising prices. [Sour Market Sends Investors to Bond ETFs]
Meanwhile, yields on top-rated state and city debt due 2024 dipped to 1.97%, its lowest since May 23, 2013, reports Brian Chappatta for Bloomberg. [Muni Bond ETFs Maintain Strong Fundamentals]
“There is a rush to buy flight-to-quality bonds like Treasurys,’’ Tom di Galoma, head of fixed income rates at ED & F Man Capital Markets, said in the Bloomberg article.
U.S. government debt is attracting safe-haven investors after a round of weak U.S. economic data Wednesday compounded global economic concerns. Many observers are now questioning the ability of the U.S. to hold up against ailing economies overseas, notably in Europe. The Federal Reserve has also said it will be be patient in raising interest rates, citing weakness in Europe at its last policy meeting.
The government revealed that U.S. retail sales experienced a 0.3% decline last month while the producer-price index, a gauge of wholesale inflation, dipped 0.1% in September.
“It just seems everywhere one looks, none of the news is good news and as such there is little else to buy other than Treasurys,’’ Anthony Cronin, a Treasury bond trader at Société Générale SA., said in the Bloomberg article.
Additionally, some strategists argue that short covering is also exacerbating the sell-off. As the Treasuries market continue to strengthen, short sellers have been forced to close out their bearish calls and buy into the market, fueling gains.
“We have seen speculators cover up their shorts in euro dollars, two-year futures, as well as five-year futures, over the last two weeks,” Natan Magid, strategist at BMO Capital Markets, said in a Reuters article “We had a short-covering rally.”
iShares 7-10 Year Treasury Bond ETF
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Max Chen contributed to this article.