Without the Federal Reserve pulling the trigger on an interest rate hike, overseas fixed-income investors have piled into more attractive U.S. government debt, bolstering U.S. Treasury bonds and related exchange traded funds.
Over the past month, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) gained 1.5%. Additionally, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) rose 4.6%, PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) increased 7.2% and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) added 7.0%. The long-term Treasury bond ETFs are also testing a long-term, 200-day simple moving average. [Demise of Treasury ETFs Over-exaggerated]
Yields on benchmark 10-year Treasury notes dipped to 2.15% Monday, a two-month low, and have declined about 34 basis points since a June high.
Pushing down yields and supporting the U.S. Treasuries market, European investors have been throwing money into higher yielding U.S. bonds on the diverging policies between the Federal Reserve and European Central Bank, report Joel Lewin and Gavin Jackson for the Financial Times.
European investors are betting that U.S. bonds have more or less priced in a Fed interest rate hike, so any further further strength in the U.S. dollar relative to the euro could compensate them if the U.S. bonds dip on a tighter Fed monetary policy – a stronger greenback would add to USD-denominated Treasury bond yields when converted into the weaker euro for European investors.
“Investors are thinking I can take a small bit of pain on my bonds if I make it back on the currency,” Sean Taor, head of debt capital markets in Europe for the Royal Bank of Canada, told the Financial Times.
The Fed has already stated it will raise interest rates from its record near-zero levels sometime this year. Market observers have speculated that the Fed could hike rates as soon as September while others are betting on a December rate hike.
U.S. Treasury yields also dipped Monday after a disappointing manufacturing report added to further doubts that the Fed would raise rates as soon as September, reports Min Zeng for the Wall Street Journal.
Meanwhile, the ECB has been implementing a €60 billion, or $65.7 billion, per month quantitative easing program, which has helped push down yields across the Eurozone. For instance, 10-year German bunds only yield 0.63%, compared to its long-term average of 2.7%. Additionally, the spread between German and U.S. government bonds are nearing their widest level.
Consequently, with pension requirements rising for an aging populace, both Europe and U.S. demand for income has increased, according to Roger Webb of Aberdeen Asset Management.
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.