Hot-money speculators are turning increasingly bullish on short-term U.S. government bonds. Fixed-income investors can also target the lower end of the yield curve through focused exchange traded fund plays as well.
According to the latest Commodity Futures Trading Commission data, short-term traders turned to a bullish wager on two-year notes in the week ended May 22, Bloomberg reports.
The shift in strategy came days after yields on the maturity, the most vulnerable benchmark note when it comes to expectations for Federal Reserve policy, hit its the highest in a decade. The two-year yield fell to 2.32% Tuesday.
BMO Capital Markets analyst Aaron Kohli argued speculators may be hedging risk that the European upheaval, which could result in a de facto referendum on Italy’s membership in the Eurozone, slows the Federal Reserve’s rate-hike plans.
Rising Safe-Haven Demand
“People are running to the havens as the rhetoric in Italy has heated up,” Kohli, an interest-rate strategist, told Bloomberg. “With all the global central banks tightening – or removing accommodation – the cushion and buffer against these adverse events is drying up. We are in an environment now where Treasury yields will take the stairs up and the elevator down.”
Kohli also believed that the shrinking bearish stance may also fuel a sizable short squeeze given the extreme shift and may potentially help short-term Treasuries maintain their rally.
“Going forward, the haven demand will be more about the 5- and the 10-year note as the market becomes more acutely aware of these global risks, which already are much bigger than we thought just last week,” Kohli added.
Fixed-income investors can also target the short-end of the yield curve through targeted ETF plays. For example, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), which has a 1.88 year effective duration, has a 2.37% 30-day SEC yield. The Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO), which has a 2.0 year duration, comes with a 2.47% 30-day SEC yield. The Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH), which has a 1.9 year average duration, shows a 2.45% yield. The SPDR Portfolio Short Term Treasury ETF (NYSEArca: SPTS) has a 1.86 year duration and a 2.49% 30-day SEC yield.
For more information on U.S. government debt, visit our Treasury Bonds category.