The better-than-expected employment numbers are fueling bets that the Federal Reserve will hike rats sooner rather than later, pressuring short-term Treasury bond exchange traded funds as the yield curve flattens.
On Friday, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) and Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH) all declined about 0.2%.
SHY has a 1.95 year duration, a 0.36% 30-day SEC yield and 0.15% expense ratio. SCHO has a 1.93 year duration, 0.37% 30-day SEC yield and a 0.08% expense ratio. VGSH has a 1.9 year duration, a 0.41% 30-day SEC yield and a 0.12% expense ratio.
Two-year Treasury note yields touched 0.65% mid-Friday, the highest level since 2011. Bond yields and prices have an inverse relationship, so a rising yield corresponds with falling prices. Meanwhile, benchmark 10-year Treasury yields are hovering around 2.32%. [Short-Term Treasury ETFs Get Spooked]
Short-term Treasury bonds, which are more sensitive to Fed policy changes, rose after the Labor Department stated that employers added a better-than-expected 321,000 jobs in November, compared to expectations of 230,000, raising the likelihood that the Fed could tighten its monetary policy, Bloomberg reports.
“The labor market is stronger than what the market was looking for,” Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit, sad in the Bloomberg article. “It brings the Fed back into the picture and raises the risk that the Fed could tighten monetary policy sooner than what the market was looking for. And you’re seeing this in the flatter yield curve.”
A flatter yield curve illustrates an environment where the yield difference between short- and long-term debt securities begin to shrink. The difference between yields on 5-year and 30-year bonds shrunk to 1.29 percentage points, the least since 2009.
“The data means that the chances for the Fed hiking rates next year increases,” Todd Colvin, a senior vice president at Ambrosino Brothers, said in the article. “The short-end, which is pinned to what the Fed will do, is taking the brunt of the pain. It’s a major curve flattening today.”
Investors who are wary about a flattening yield curve can look at the iPath US Treasury Flattener ETN (NYSEArca: FLAT). FLAT strengthens as the yield curve flattens or takes the inverse of the Barclays US Treasury 2Y/10Y Yield Curve Index, which holds long positions in 2-year Treasury futures and short positions in 10-year Treasuries. However, potential investors should use limit orders to better execute trades as the exchange traded note shows an average daily volume of about 3,500 shares. [Shorter Term Bond ETFs in Focus]
iShares 1-3 Year Treasury Bond ETF
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.