Treasury bonds exchange traded funds have surged this year, with Treasuries enjoying their best start to a year since 2003, as global economic weakness and increased uncertainty, such as the upcoming “Brexit” vote, bolstered demand for safe-havens.
Among the best performing Treasury bond ETFs so far this year, he iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) gained 14.3%, PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) increased 21.7% and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) advanced 20.7%.
The yield on benchmark 10-yer Treasury notes inched higher Friday to 1.618% after dipping to a low of 1.518% Thursday, its lowest level since 2012.
According to the Bank of America Corp.’s U.S. Treasury Index, Treasuries have returned 4.8%, the most at this period of the year since 2003, as traders anticipated a falling likelihood of a Federal Reserve interest rate hike, with the probability of a move this year dipping to about 49% from 74% at the end of May, Bloomberg reports.
U.S. government bonds rallied this month after a June 3 report revealed the weakest job creation in almost six years, diminishing the chances the Fed would hike rates on a rebounding economy.
Since the weak economic report, global economies have been anxiously waiting on the prospects of a so-called Brexit or the United Kingdom’s referendum on whether or not to stay within the European Union. The Federal Reserve and Bank of Japan even cited the referendum as a factor in delaying further action in monetary policies.[related_stories]
“We have a Treasuries yield curve that’s clearly reflecting that expectation of lower-for-longer rates, and is also clearly being influenced by global capital flows,” William Northey, chief investment officer for U.S. Bank’s private client group, told Bloomberg. “We’re receiving a lot of capital flows from around the world right now, which is influencing how low our rates have moved.”
Northey is referring to the increasing number of negative yield-generating bonds in international markets, which has caused many foreign investors to look into U.S. fixed-income assets as a better source of yield.
Related: Safe-Haven ETFs for a Rocky Summer
For instance, the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF recently attracted a $138 million block traded, representing more than 60% of outstanding shares, Bloomberg reports.
“Zeros do well in a rally, always,” George Goncalves, head of U.S. interest rates research at Nomura Securities, told Bloomberg. “They are a pure play on duration.”
For more information on the Treasuries market, visit our Treasury bonds category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.