20-Year Treasury Bond Makes a Comeback

1986 was the last year Halley’s Comet passed the Earth and it was also the last time a 20-year Treasury bond was around. However, the Treasury Department is bringing the 20-year bond back to help pay the $1 trillion dollar budget deficit, which has been on a meteoric rise.

The bond could hit the capital markets by May and the Treasury Department will divulge more details on the issue on February 5. Per a CNBC report, news of the 20-year bond prompted strategists to say “investors were betting the new 20-year will help drive rates higher at the long end of the Treasury curve. The 10-year yield Friday rose 2 basis points to 1.82%, while the 2-year yield was at 1.55%, off from a high of 1.58%.”

“You’ve got more supply coming at the back end, and people think implicitly Treasury won’t take all of the 20-year supply out of the 10-years and 30-years, so there’s more long issuance coming and there will be less front end,” said Michael Schumacher, director, rates at Wells Fargo.

“For the 20-year, the plumbing is still all set up. This would fit nicely into the futures contracts,” added Schumacher. “If the Treasury had gone with the 50-year, it would have been out there by itself. It’s guess work where that would have to price. This is a lot more clear.“

ETF investors who are seeking Treasury bond exposure without purchasing the actual bonds themselves can look to funds the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT). TLT seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index (the “underlying index”). The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than or equal to twenty years.

Core Bond Exposure

For core bond exposure in investment-grade debt, ETF investors can opt for the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG).

Fund Facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

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