In order to help reduce a $1 trillion dollar budget deficit, the Treasury Department announced earlier this year that it would reintroduce a 20-year bond. According to an article in the International Finance Review, this new issue should help add liquidity as well as provide a hedge for corporate assets—a move that’s also a positive for corporate bonds.
“We think this is positive for corporate bonds especially the 20-year sector,” said Daniel Alexander, a trader at Western Asset Management Co.
It’s a move to help prop up the long end of the yield curve where currently, investors have to go in search of the highest yields. With global yields at lows, investors need to take on more duration risk in order to obtain higher yields.
The long end of the curve is seeing buyers, particularly from insurance companies and pension funds. The higher yields give these buyers enough income to meet future payment obligations given the current low-yield environment.
“The natural buyer for that part of the curve would be liability driven investors, insurance companies, and pension funds,” said Conning’s head of corporate and municipal bond teams Matt Daly. “Increased issuance, assuming we remain in the same macro environment, would be well received.”
Getting that Core Bond Exposure via ETFs
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.
For core bond exposure in investment-grade debt, ETF investors can opt for the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG).
- 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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