With the Federal Reserve laying off raising interest rates to this point in 2016 and with trillions of dollars negative-yielding debt found in other developed markets, exchange traded funds holding U.S. government debt are favored destinations among income investors this year.
iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT). 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.
Moreover, U.S. fixed-income market may find further support from overseas demand, especially with international bonds offering paltry yields. For instance, Japanese 20-year notes and the Danish 10-year bonds saw their yields go negative for the first time this year.
However, data indicate that traders that are bold enough to short bond ETFs, meaning they profit when these ETFs decline, are favoring the longer end of the yield curve.
“It is interesting to notice that although investors are getting long US treasury exposure via ETFs throughout the entire duration curve, short sellers are predominantly in the long term end of the curve with $4 out of every $5 shorted via ETF in the 20+ year duration bucket,” according to an S3 Partners note posted by Teresa Rivas of Barron’s.
TLT has been a popular Treasury bond play for yield generation over the past few years after the Federal Reserve implemented near-zero interest rates and a robust bond purchasing program. However, TLT comes with a 17.72 year duration – a 1% increase in interest rates would translate to about a 17.72% decline in the fund’s price.
Still, betting against Treasurys is, to this point in 2016, an ambitious and losing bet.
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.
For more information on the fixed-income market, visit our bond ETFs category.
iShares 20+ Year Treasury Bond ETF
Tom Lydon’s clients own shares of TLT.
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.