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%.
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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.
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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.