- Treasury bond-related ETFs could continue to weaken as rising inflation and Federal Reserve interest rate normalization send yields higher
- Investors have raised bets on the Fed moving rates in 2016 after a gauge of inflation expectations
- The probability of the Fed hiking rates this year rose to 78%, the highest in two months
Despite concerns about ongoing market volatility, Treasury bond-related exchange traded funds could continue to weaken as rising inflation and Federal Reserve interest rate normalization send yields higher.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) declined 1.8% over the past month, dipping below its short-term 50-day simple moving average, as yields on benchmark 10-year Treasury bonds rose to 1.959% from a 1.567% low in mid-February.
The Treasury bond market may continue to experience more weakness ahead. PIMCO Fund Manager Mark Kiesel projects U.S. 10-year yields will increase to a range of 2% to 2.5% this year, reports Wes Goodman for Bloomberg.
Supporting the rising yield outlook, investors have raised bets on the Fed moving rates in 2016 after a gauge of inflation expectations for the coming 12 months rose to its highest in almost a year. However, most market observers believe policy makers will stand pat on their ongoing two-day meeting.
“We see one to two rate hikes this year for the Fed, whereas the market is only expecting only one,” Kiesel said. “If rates were to head towards 2.5 percent, we would be looking to add at that level.”
The probability of the Fed hiking rates this year rose to 78%, the highest in two months, according to futures contract activity as the economy showed signs of improvement. For instance, the U.S. added more jobs in February than analysts predicted and the slump in factory activity showed signs of easing.
Other money managers also anticipate the Fed to hold back on rate hikes this year. Morgan Stanley recently forecasted only one rate hike in December out of the Fed this year, predicting yields on 10-year Treasuries will dip to 1.45% by the end of September.
Nevertheless, bond yields push highers and weigh on bond prices, especially on long-duration assets, investors can turn to bearish long-term bond ETFs to hedge further Treasury debt weakness. For example, the ProShares Short 20+ Year Treasury (NYSEArca: TBF) takes the simple inverse or -100% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. The ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) tries to reflect the -2x or -200% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. Additionally, the Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) tracks the -3x or -300% daily performance of the NYSE 20 Year Plus Treasury Bond Index.
iShares 7-10 Year Treasury Bond ETF