Short-term Treasury bond exchange traded funds are beginning to outperform their longer-term counterparts as investors ease up on Federal Reserve interest rate expectations and anticipate rising inflationary pressures.
Over the past week, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) and Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH) only dipped 0.1%.
Meanwhile, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) declined 4.0%, PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) decreased 6.3% and Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) declined 5.8% over the past week.
Treasury bond market is experiencing a steepening yield curve, with the extra yield that investors demand on 30-year over 5-year Treasury obligations rose for the ninth straight day, its longest streak since 2012, reports Eliza Ronalds Hannon for Bloomberg.
[related_stories]Yields on 5-year notes were hovering around 1.20% Wednesday, whereas yields on 30-year notes were at 2.45%. The spread reached 125 basis points or up from as low as 102 basis points last month. The last time the yield curve steepened this quickly was in August 2012 after primary dealers offloaded billions in 30-year debt to the Fed as part of its debt-purchasing program.
Bond traders are turning to shorter maturities as more anticipate the Fed to keep interest rates steady at least through next week’s policy meeting. If the Fed stands pat on rates, it could potentially stoke inflation, which would diminish the value of long-term debt – rising inflation diminishes the overall real yield on bonds.
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Looking at the Fed funds futures market, options traders see a one-in-five chance that the Fed will tighten its monetary policy this month amid tepid economic growth and restrained inflation.
“More than rates, the curve shape has been consistent, and telling a strong story,” Aaron Kohli, fixed-income strategist in New York at BMO Capital Markets Corp., told Bloomberg. “Everyone thinks the Fed will be on hold forever.”
For more information on the Treasuries market, visit our Treasury bonds category.
iShares 1-3 Year Treasury Bond ETF