At a time when 10-year Treasury yields are staring a 22.3% year-to-date decline in the face, noting that now would be good time exchange traded funds holding Treasuries to again assert themselves might seem silly.
After all, Treasury ETFs have been market darlings this year. The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) is up 17% this year, but that even that performance seems mediocre when compared to an average 2014 gain of about 30% for the PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) and the Vanguard Extended Duration Treasury ETF (NYSEArca: EDV). [Why These Bond ETFs are Soaring]
However, and in somewhat quiet fashion at that, 10-year yields have surged 12.4% since Oct. 15, indicating that, yes, it could be time for bond bulls to again show their commitment to their cause.
“There are 2 things for the bulls to take comfort in, however. First, these hammers are not always reliable. As we wrote on October 3, such hammer bars in the S&P 500 have historically led to behavior in line with any other day, i.e, no edge. Secondly, we discovered just 3 other such instances in the 30-Year Yield since 1985 in which the yield dropped more than 10% during the week only to close the week close to positive. None of those 3 marked a significant low. In fact, by 3 months later, bond yields were an average of 114 basis points lower than the reversal/hammer date,” according to Dana Lyons, partner at J. Lyons Fund Management.
The question is how much more can be expected of bond bulls, particularly those using ETFs as their instrument of choice.
Although October ended up being a fine month for equities, over $17 billion in new money was allocated to bond ETFs topping the previous record of $17 billion set in February. That brings the year-to-date inflows total to bond ETFs to $47 billion, just $200 million shy of the previous January through October record set in 2012, according to BlackRock data. [A Banner Month for Bond ETFs]
The US fixed income ETF industry is on track to hit $300 billion in assets under management for the first time. As of October 29th, the industry is at $294.8 billion, according to BlackRock. Since 2008, the fixed income corner of the U.S. ETF industry has grown nearly fivefold.
Treasury ETFs are contributing to that asset growth in significant fashion, particularly in the current quarter. Since the start of the fourth quarter, five of the top-10 asset gathering ETFs are bond funds, including two dedicated Treasury funds. That group also features the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) and the Vanguard Total Bond Market ETF (NYSEArca: BND), both of which have large allocations to Treasuries. [Buffers With Bond ETFs]
Chart Courtesy: J. Lyons Fund Management
Tom Lydon’s clients own shares of TLT.