The Treasuries market is selling off and yields are rising. However, without a Federal Reserve interest rate hike immediately hanging over our heads, contrarian investors may take a look at long-term Treasury bond exchange traded funds.
Jeffrey Gundlach, chief executive of investment firm DoubleLine Capital, argued that the Fed will probably not hike rates this year due to the lack of wage inflation, reports Jennifer Ablan for Reuters.
Currently, there is not enough wage growth. If consumers are not generating higher incomes, they are not buying more goods, a precursor to demand-induced inflation.
“Get out of high-yield bonds and buy Treasuries” when the Fed starts pushing rates up, Gundlach said. “Worked in every single Fed rate hike in history.”
Long-term Treasuries have recently taken a beating. For instance, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) fell 7.4%, PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) declined 12.7% and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) dropped 11.7% over the past three months. The long-term Treasury bond ETFs are now trading below their 200-day simple moving average. [Inflationary Concerns Send Treasury ETFs Below Long-Term Support]
If the Fed does hike rates without the necessary inflation, Gundlach contended that we would be only be importing deflation as many foreign central banks are enacting a beggar-thy-neighbor policies through low rates and quantitative easing.
Consequently, under the currently weak economy, a Fed tightening would cause long-duration securities, like 30-year Treasuries, to rally and yields to fall.
ETF investors now have a chance to play on Gundlach’s investment outlook through the recently launched SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL). The actively managed TOTL represents an ETF adaptation of DoubleLine’s flagship Total Return Bond Fund.
However, potential investors should be aware that TOTL currently overweights mortgage-backed securities at 55.7% of the portfolio’s holdings and Treasuries only make up 5.2% of the ETF’s underlying components. Since TOTL is an actively managed ETF, Gundlach can shift allocations down the line.
More aggressive traders can consider leveraged options to play a bounce in Treasuries, such as the ProShares Ultra 20+ Year Treasury (NYSEArca: UBT) and Direxion Daily 20+ Year Treasury Bull 3x Shares ETF (NYSEArca: TMF). However, potential investors should be aware that these types of leveraged investments come with greater risks and should be closely monitored.
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.