Treasury bond exchange traded funds continued to deteriorate, with yields on benchmark 10-year Treasury notes hitting a 17-month high Thursday, as crude oil prices continued to strengthen, fueling inflation expectations.
The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) dropped 1.0% and iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) fell 0.4% on Thursday as yields on 10-year Treasury notes rose to as high as 2.488%.
Meanwhile, inverse bond ETFs continued to strengthen off the back of the weakening Treasury bond market. On Thursday, the ProShares Short 20+ Year Treasury (NYSEArca: TBF) returned 1.1%, ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) gained 1.9%, ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) increased 3.1% and Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) advanced 2.9%.
The current sell-off in the Treasuries market was triggered by the sudden surge in crude oil prices, which have extended from Wednesday after the Organization of Petroleum Exporting Countries reached an accord to curb oil production.
Consequently, the higher oil prices have fueled inflation expectations, which diminishes debt securities’ fixed returns over time. The real yield or rate of return after adjusting for changes in inflation is depressed when inflation.
Investors expect U.S. inflation to run at an annual rate of 1.98% on average over the next decade, or 1.36 percentage points higher shortly after the Brexit vote, reports Min Zeng for the Wall Street Journal. The Federal Reserve has a targeted 2% inflation rate.
Moreover, further pressuring the Treasury bond market, a solid U.S. manufacturing release Thursday strengthened optimism over the U.S. economy and drove investors away from safe-haven assets.
Looking ahead, investors will be watching for the U.S. nonfarm payrolls report on Friday, one of the most important monthly economic indicators. Observers expect an upbeat report could add to increased demand for riskier assets and drive further selling in bonds.
“We are moving to a new regime in the bond market,” Nick Gartside, international chief investment officer of global fixed income at J.P. Morgan Asset Management, told the WSJ.
For more information on the Treasuries market, visit our Treasury bonds category.