The Federal Reserve finally pulled the trigger on hiking interest rates Wednesday, and the beneficiaries are long-term Treasury bonds exchange traded funds?
Treasury bond ETFs that track government debt securities with long-term maturities strengthened Thursday, the day after the Fed announced an interest rate hike. The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), which has a 17.37 year duration and a 2.83% 30-day SEC yield, was up 1.2% Thursday. The PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ), which has a 27.22 year duration and a 2.95% 30-day SEC yield, rose 1.6%. The Vanguard Extended Duration Treasury ETF (NYSEArca: EDV), which has a 24.7 year duration and a 3.02% 30-day SEC yield, gained 1.6%. [Are You Underestimating Treasury Bond ETFs?]
Meanwhile, yields on 30-year Treasury notes dipped to 2.936%.
While bonds typically have an inverse relationship to rising rates, the Fed’s rate hike decision on Wednesday fueled appetite for U.S. assets from foreign investors, report Eddie Van Der Walt and Anooja Debnath for Bloomberg.
As foreigners piled into U.S. assets, the foreign investors also fueled demand for U.S. dollars to acquire the U.S. assets. Consequently, the USD has strengthened, with the Dollar Index up 1.4% to 99.236 Thursday.
The stronger dollar is weighing on USD-denominated commodities.
“A stronger dollar will make commodities more expensive in other currencies, potentially limiting demand,” David Wilson, an analyst at Citigroup Inc., told Bloomberg. “A lot of macro-investors will look at it this way, with a resulting influence on price.”
With commodity prices falling, traders are anticipating lower inflation, which would help preserve the value of fixed-income payments. Since long-term debt securities are more sensitive to the inflation outlook, Treasury bond funds with longer durations are outperforming.
“We got what we expected from the Fed and now the oil price continues to slide down,” Jens Peter Soerensen, chief analyst at Danske Bank A/S, told Bloomberg. “Short term this pushes down people’s inflation expectations. … We are pretty confident on bonds in general.”
iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT)
For more information on the Treasuries market, visit our Treasury bonds category.
Max Chen contributed to this article.