Earlier this week our Market Technician David Chojnacki was featured in ETF.com in an article titled “The Bond Party Is Over, Long Live Bonds” mentioning specifically “It appears the bond sell-off began overnight in the Japan and German Markets and is continuing around the globe.
I’ve heard one pundit on CNBC blame last night’s selling on margin calls. Bonds have been falling since February. We continually monitor TLT and ZROZ.
They have both broken through their 200D-SMA’s and are about to test November 2014 lows. There appears to be fairly good support at 118.30 for the TLT and at 107.50 for the ZROZ. The bias will remain to the downside while they remain below their 200DSMA’s”.
Which brings us to ZROZ (PIMCO 20+ Year Zero Coupon U.S. Treasury, Expense Ratio 0.15%), a fund that we have not covered terribly often but worth looking at especially since David mentioned it in the context of the recent bond sell-off.
According to fund literature, ZROZ “aims to capture the returns of the BofA Merrill Lynch Long U.S. Treasury Principal STRIPS Index” giving investors unique exposure to Treasury STRIPS in ETF form.
According to Investopedia, “Treasury STRIPS are fixed-income securities that are sold at a significant discount to face value and offer no interest payments because they mature at par.” Thus, these securities, and corresponding ETFs like ZROZ, are extremely sensitive to movements in interest rates in the marketplace, and the longer duration of the STRIPS (20+ years) within the ZROZ basket magnifies this sensitivity.
In spite of recent heavy selling pressure in Bonds (and a hike in market interest rates), ZROZ has only seen modest outflows in the trailing one month period (about $11 million out of the fund via redemptions), but then again the fund only has modest assets under management $117 million.
PIMCO 25+ Year Zero Coupon US Treasury Index Fund
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