For seemingly all of this year, a source of never-ending conversation, consternation and speculation has been if and when the Federal Reserve will finally raise interest rates.
Recent data suggest traders have been betting the Fed will boost borrowing costs at its September meeting, but some rate-sensitive asset classes say otherwise. Actually, Treasury yields say otherwise. The yield on the benchmark 10-year Treasury has tumbled more than 12% over the past month and now resides at two-month lows.
Those falling yields are boons for rate-sensitive exchange traded funds such as the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) and the Utilities Select Sector SPDR (NYSEArca: XLU). TLT has surged nearly 8% over the past month while XLU, the largest utilities ETF, has posted a third-quarter gain of over 6%, easily making it the best of the nine sector SPDRs over that period. [ETF Chart of the Day: Utilities Light Up]
“Government bonds and Utilities are often viewed as being sensitive to interest rates. If billions of free thinking people think rates will rise, they usually sell rate sensitive and the opposite is true as well,” notes Chris Kimble of Kimble Charting Solutions. “It appears of late that some feel interest rates are actually going to head lower, as TLT and XLU are both breaking above resistance of these bullish falling wedge patterns.”
The number of bearish U.S. government debt investors have declined as crude oil prices fell, reports Alexandra Scaggs for Bloomberg. In July, commodities have plunged 10%, contributing to the bond market’s inflation forecasts – lower inflation translates to improved real yield for long-term Treasuries.
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.
Investors have added $35.5 million to TLT during the current quarter while XLU has seen inflows of nearly $637 million, one of the top totals among all sector ETFs.
Chart Courtesy: Kimble Charting Solutions