Rising inflation expectations have weighed on the Treasuries market, pushing long-term Treasury bond exchange traded funds below a key support level.
Over the past month, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) fell 5.9%, PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) declined 9.4% and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) dropped 8.9%. These long-term Treasury bond ETFs dipped below their 200-day simple moving average Tuesday.
Meanwhile, the 30-year Treasury bond yield is hovering above its 200-day moving average as well – bond prices and yields have an inverse relationship, so a rising yield corresponds to falling bond prices.
Pressuring the Treasuries market, investors are anticipating higher inflation down the road, especially after the rebound in energy prices, reports Alexandra Scaggs for Bloomberg.
“People aren’t concerned about deflation anymore,” Justin Lederer, interest-rate strategist at Cantor Fitzgerald LP, said in the article. “That trade is, at least for now, in the background.”
Furthermore, the U.S. dollar has also been weakening against foreign currencies.
“The dollar is weakening and oil is picking up. Wages are going up,” Marc Pfeffer, a Westchester, senior portfolio manager for CLS Investments, said in the article. “You could have some inflation in the U.S. sticking.”
For fixed-income and bond ETF investors, rising inflation eats away at portfolio returns over time. Specifically, the so-called real, or inflation-adjusted, return is diminished as inflation rises. Consequently, investors are less apt to hold onto a fixed-income asset with diminished real returns, contributing to the fall in bond prices. [Rising Inflation Expectations Weigh on Treasury Bond ETFs]
The 30-year bond yields rose above the 200-day of 2.849% Monday and ended at 2.906% Tuesday. After breaking the long-term resistance, the yield could rise as high as 3%, Tyler Tucci, a strategist with RBS Securities in Stamford, warned.
Looking ahead, traders will be watching for the U.S. jobs report on Friday, which could potentially influence Federal Reserve policymakers cogitating on its near-zero interest rate policy.
Some traders are already shifting into Treasury Inflation-Protected Securities as a hedge against rising consumer prices. For instance, Pfeffer said he acquired some TIPS exposure through iShares TIPS Bond ETF (NYSEArca: TIP). [Big Bets Made on big TIPS ETF]
iShares 20+ Year Treasury Bond ETF
For more information on Treasuries, visit our Treasury bonds category.
Max Chen contributed to this article.