With fixed income exchange traded funds swelling in size and many U.S. government bond ETFs at or flirting with all-time highs, there is a growing chorus of market observers that doubt the rally in bonds can continue.
Four of this year’s top 10 asset-gathering ETFs are bond funds, but some market observers are concerned investors are glossing over underlying weakness in the bond market. Investors may be attracted to the cheap valuations and wider yield premiums that these bonds offer over safe-haven government bonds after benchmark yields on 10-year Treasuries dipped back toward all-time lows. Moreover, the rebound in energy prices could have reassured investor fears of a potential defaults in the energy space.
Still, there alternative points of view that suggest, particularly with the Federal Reserve continuing to pass on raising interest rates, that U.S. government bond ETFs, such as the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) offer more upside.
“TLT’s rip has been accompanied by quite the surge in demand for options. That’s right, bond lovers haven’t been content to scooping up shares of TLT only, they’ve gone for the jugular by grabbing derivatives. The leverage potential has their eyes bulging,” according to InvestorPlace. “The implied volatility rank has lifted to 50%, a four-month high, signaling option premiums are now ripe for the selling. Two tasty trades come to mind.”
There are some obvious fundamental factors that bode well for U.S. debt ETFs, namely a slew of negative interest rate policies throughout the developed world, which make the low yields on U.S. bonds look all the more attractive.