Despite benchmarks Treasury yields nearing record lows, investors may want to stick to government debt securities and bond-related exchange traded funds as more continue to pare bets on further Federal Reserve interest rate hikes.
Treasury bond ETFs that track government debt securities with long-term maturities have been strengthening. For instance, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), which has a 17.59 year duration and a 2.45% 30-day SEC yield, gained 6.8% year-to-date. The PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ), which has a 27.35 year duration and a 2.68% 30-day SEC yield, rose 11.5%. The Vanguard Extended Duration Treasury ETF (NYSEArca: EDV), which has a 24.7 year duration and a 2.71% 30-day SEC yield, increased 10.3%.
Despite the dip in yields and rising momentum in Treasury bonds, Morgan Stanley Strategists argue that there’s more room for yields to fall as economic data falls short of expectations, reports Kevin Buckland for Bloomberg.
“Despite the meaningful decline in sovereign yields since the Fed lifted off in December, we would rather overstay our welcome than miss a continuation of the move to lower yields,” Morgan Stanley analysts led by Matthew Hornbach, head of global interest-rate strategy, said in a note. “We do not think Fed Chair Yellen’s testimony will loosen financial conditions enough for global yield curves to steepen.”
Yields on benchmark 10-year Treasury bonds are now back down to 1.735%. Treasuries have experienced one of their best starts to a new year since the financial crisis as global growth concerns, falling oil prices and an earnings recession spurred a selloff in riskier assets and increased demand for safe-haven assets. [ETF Investors Flock to Safe-Haven Assets]
“At this moment, Treasury investors feel the yield is not at an attractive level to buy more, so that’s why their first instinct is to sell,” Kazuaki Oh’E, head of fixed income at CIBC World Markets Japan Inc., told Bloomberg. “But in a relative sense, the Treasury yield is really attractive compared to the rest of G-7, so it’s not going to rise too much.”
While benchmark 10-year Treasury yields are back below 2%, Treasury bond yields still look more attractive for foreign investors. For instance, yields on 10-year German bunds is 0.22% and yields on 10-year Japanese government bonds is 0.03%. The yields on 10-year Treasuries offered a 96 basis-point premium over that of the average Group of Seven peers Monday.
Looking ahead, fixed-income investors are waiting on Fed chair Janet Yellen to appear before the House Financial Services Committee Wednesday and her address to the Senate Banking Committee Thursday.
Max Chen contributed to this article.