Treasury Bond ETFs Rally, Yields Dip to Record Lows on Rising Bets

Safe-haven, U.S. Treasury bonds and related exchange traded funds are rallying while yields on benchmark Treasuries plunging to record lows in response to ongoing risk-off selling pressure and the Federal Reserve’s looser monetary policy stance.

On Friday, the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (NYSEArca: ZROZ) advanced 10.5%, Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV) increased 8.6% and iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) rose 6.4%.

Meanwhile, yields on benchmark 10-year Treasury notes dipped to 0.706% and yields on 30-year notes dropped to 1.215%

Treasury yields hit record lows Friday, with long-bond rates experiencing their biggest intraday drop since 2009, on growing concerns over the potential global economic impact of a spreading coronavirus, Bloomberg reports.

“We expected the virus to have a big impact,” Tony Farren at Mischler Financial Group, told Bloomberg. “But it has gone way beyond our wildest expectations. I thought last Friday was the blow-off top and then a few times this week before today, but now it’s beyond belief.”

Shaun Roache, Chief Asia-Pacific Economist at S&P Global Ratings, argued that investors are now pricing in a return of accommodative measures out of the Federal Reserve, along with an expansion in Bank of Japan asset purchases. Meanwhile, money markets watching out for the European Central Bank, which could lower its deposit rate or boost asset purchases next week.

“What we are seeing is symptomatic of not enough positive-yielding, defensive assets within global fixed income,” John Taylor, a money manager at AllianceBernstein, told Bloomberg. “Central banks are doing everything they can to provide stimulus, which can add fuel to the flames of the bond rally.”

The Federal Reserve has already cut its benchmark rates by half a point to a range of 1.00% to 1.25% in an emergency meeting, and traders are now betting that the central bank could do more.

“The market’s focus is squarely on the growing likelihood of the Fed once again hitting the zero lower bound on short-term interest rates and restarting quantitative easing,” Chris Jeffery, head of rates and inflation at Legal & General Investment Management, told Bloomberg. “With the number of coronavirus cases spiraling higher every day, it’s a brave investor who stands in front of that trend.”

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