Despite a tighter monetary policy out of the Federal Reserve with two more interest rate hikes planned later this year, Treasury bonds and related ETFs have been gaining momentum in recent weeks.
Over the past month, the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (NYSEArca: ZROZ) advanced 3.6%, Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV) gained 3.8% and iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) increased 2.4%.
Yields on 30-year Treasury notes are now hovering around 2.95% while yields on benchmark 10-year notes are at 2.83%.
Meanwhile, the yield spread between short- and long-term Treasuries has narrowed to nearly 11-year lows, reflecting greater investor caution over the economic outlook, reports Daniel Kruger for the Wall Street Journal.
A Flattening Yield Curve
The difference between yields on two- and 10-year U.S. government notes settled at 0.302 Tuesday, its narrowest since August 2007.
Short-term Treasury yields usually rise along with investor expectations for tighter Fed rate policies while longer-term yields are more sensitive to growth and inflation sentiment.
Investors typically monitor the yield curve, or difference between long- and short-term yields, as an indicator for economic growth. The last time short-term rates exceeded long-term yields was before each recession since at least 1975, or something also known as an inverted yield curve.
“It’s a red flag, and you need to be cognizant of what’s driving it,” Sean Simko, head of global fixed-income management at SEI Investments, told the WSJ.
Long-term Treasury yields are also being depressed by an increased demand out of U.S. pension funds as companies take advantage of temporary tax savings, report Ben Eisen and Daniel Kruger for the WSJ.
S&P 500 companies are contributing to pension plans this year at a pace expected to match 2017 levels at $63 billion, the most since 2003, according to Goldman Sachs Asset Management. pension funds also tend to invest in long-dated bonds to match their long-term liabilities, which has contributed to a rise in long-term bonds or falling yields.
Long-term yields are “very low because people are still putting money into Treasurys,” Torsten Slok, an economist at Deutsche Bank, told the WSJ.
For more information on the fixed-income market, visit our bond ETFs category.