The Federal Reserve gave Treasurys and the corresponding exchange traded funds, such as the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), a bit of a reprieve last week by not raising interest rates. However, the increasingly dividend Fed could still raise rates later this year and that has some market observers sounding a cautious tone on long-term U.S. government debt.
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.
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The low yields in overseas markets have also helped support U.S. Treasuries as an attractive alternative source of yield for foreign investors. According to Fitch Ratings, a record $11.7 trillion of global sovereign debt has now entered sub-zero territory, reports Adam Samson for the Financial Times.
“It’s time to rethink the role of U.S. Treasuries in portfolios, and specifically to be cautious of long-duration Treasuries. The risk-reward landscape for long-duration Treasuries is shifting,” according to a BlackRock note posted by Amey Stone of Barron’s.
Weakness in TLT should help the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT), which tries to reflect the -2x or -200% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
Alternatives to TBT include the ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) takes the -3x or -300% 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.