Treasuries and bond-related exchange traded funds are shaking off speculation of a Federal Reserve interest rate hike as the Greece debt problems and plunge in Chinese equities fuel safe-haven demand.
Since the June 26 close, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) gained 1.3% and the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) rose 2.7%.
Investors also headed back into long-term Treasuries, funneling $166.8 million to TLT over the past week, according to ETF.com.
Supporting the Treasuries market after the sell-off over the past few months, Greece’s financial problems and sudden plunge in Chinese equities have left some wondering if the Fed will push off on hiking rates, reports Daniel Kruger for Bloomberg.
For instance, Deutsche Bank AG, one of the 22 primary dealers that trade directly with the Fed, now projects a rate hike in 2016.
Consequently, Treasuries are attracting greater safe-haven appeal.
“Any event that catches the market off-guard, it’s very predictable that Treasuries are going to rally,” Brandon Swensen, the co-head of U.S. fixed income at RBC Global Asset, said in the article.
Others point out that the current expansion is the weakest in the post-World War II era, and the economy is still struggling to grow fast enough to generate enough inflation to trigger a sell-off in fixed-income assets. Specifically, wage growth remains tepid, diminishing the outlook for wage inflation.
Moreover, the last time 10-year Treasuries were this cheap relative to short-term debt in September, U.S. government debt rallied over the following three months.
“There’s a good chance yields are going to crest here,” Robert Tipp, chief investment strategist in Prudential Financial’s fixed-income unit, said in the Bloomberg article.
Tipp now argues that long-term Treasuries look more attractive after the global rout in bonds over the past few months. Specifically, the so-called term premium currently shows that 10-year Treasuries provide a 0.5 percentage points more yield than short-term debt. The last time this happened in September, the notes returned 3.6% in the following three months for their best quarterly gain since 2012.
iShares 7-10 Year Treasury Bond ETF
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.