Treasury bonds and related exchange traded funds have strengthened this week, with yields dipping lower, as concerns over the economy and an aggressive monetary policy helped support safe-haven, fixed-income assets.
Over the past week, the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (NYSEArca: ZROZ) advanced 6.0%, Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV) increased 5.7% and iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) rose 4.2%.
The Federal Reserve on Wednesday stated it had no plans to hike interest rates anytime until 2022 and would continue to purchase Treasuries at a pace of at least $80 billion per month, the Wall Street Journal reports.
Bond yields have been creeping up as prices fell in recent weeks on improving optimism over the markets and economy, which fueled a shift toward riskier assets. However, safety bets surged this week on renewed concerns over the economy with a spike in coronavirus cases.
Now, many investors see little reason to expect a big surge in economic growth and inflation, which would diminish the value of fixed-income assets.
“Rates probably had gotten a little ahead of the data, and [Wednesday’s] Fed meeting reminded the market that they aren’t going anywhere anytime soon,” Robert Dishner, a portfolio manager at Neuberger Berman, told the WSJ. “The recovery is likely to be uneven.”
Investors also believe the Fed will do anything within its powers to support the economy, which should keep a lid on long-term rates since higher yields means a higher borrowing cost for businesses and consumers in a time when they need all the help they can get.
The comments from central bank officials from their policy statement to their interest-rate forecast “has enhanced the Fed’s commitment to keeping rates low,” Jay Barry, head of USD government bond strategy at JPMorgan, told the WSJ.
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