ed’s Bond Purchasing Puts Long Duration Fixed Income ETFs in Focus

As part of its bond purchasing initiatives to help maintain liquidity in this coronavirus-stricken market, the Fed went long as in long duration bonds first and foremost in last week’s Treasury note purchases. The New York Federal Reserve opened its wallet and snatched up 20- to 30-year notes followed by other durations across the board.

Per a CNBC report, this was how the schedule of purchases went:

  • About $4 billion each in 20- to 30-year purchases from 10:30-10: 45 a.m. ET.
  • About $5 billion in the 7- to 20-year space from 11:15-11:30 a.m. ET.
  • About $8 billion in the 4.5- to 7-year sector from 12:45-1 p.m. ET.
  •  About $8 billion in the zero- to 2.25-year sector from 1:30 to 1:45 p.m. ET.

The purchases represented “part of $60 billion in purchases already announced as part of the Fed’s moves to expand its balance sheet and reserves in the banking system. In addition, the central bank is reinvesting $20 billion of principal payments it receives from holdings in agency debt and mortgage-backed securities,” noted the CNBC report.

“These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak,” the New York Fed said in a statement.

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Passive and Active Long Duration Options

In times of low yields like today’s bond landscape, it can help to tilt your allocation towards fixed income exchange-traded funds like the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT).

Advantages of adding TLT to your portfolio:

  • Exposure to long-term U.S. Treasury bonds
  • Targeted access to a specific segment of the U.S. Treasury market
  • Use to customize your exposure to Treasuries

As for the fund itself, 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.

Another fund to consider for long duration exposure is the actively managed First Trust Long Duration Opportunities ETF (NYSEArca: LGOV). LGOV’s portfolio is managed using a disciplined, rigorous and repeatable combination of top-down macro-economic views coupled with bottom-up security selection.

LGOV seeks to generate current income with a focus on preservation of capital by investing at least 80% of its net assets, including investment borrowings, in investment grade fixed-income securities that are issued or guaranteed by the U.S. government. With heightened interest rate and equity market volatility, the portfolio managers believe mortgage-backed securities (MBS) are an important piece of a diversified portfolio due to their low correlation to other core asset classes and positive credit quality trends.

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