U.S. government bonds and Treasuries-related exchange traded funds have been gaining momentum as yields slide on fresh data revealing the worst quarterly economic contraction on record in the United States.
On Thursday, the iShares 7-10 Year Treasury Bond ETF (IEF) gained 0.2% and iShares 20+ Year Treasury Bond ETF (TLT) rose 0.7%. Over the past month, IEF increased by 0.5% while TLT advanced 3.3%
Meanwhile, yields on benchmark 10-year Treasury notes slipped to 0.541% and yields on 30-year notes dipped to 1.198%.
The U.S. economy is estimated to have contracted by 33% in the second quarter, overshadowing other positive data points like improving employment trends, the Wall Street Journal reports.
However, David Riley, chief investment strategist at BlueBay Asset Management, warned that overall trends show a loss in the momentum of the economy from high-frequency data on transport use and short-term restaurant bookings. Meanwhile, the push for more social distancing, ongoing concerns over job security, and higher savings rates would all weigh on economic activity and depress U.S. yields, he added.
“There is evidence to suggest that the rebound in the U.S. has been hindered by an inability to contain the virus,” Riley told the WSJ. “Europe has been containing the virus better and U.S. growth exceptionalism is no longer looking so reliable.”
Meanwhile, Federal Reserve Chairman Jerome Powell called for greater government spending to bolster the flagging economy, which could mean more Treasury bond issuance. Goldman projects a net issuance of $4.8 trillion in 2020, and $3 trillion of the new debt will come in short-term bills.
“Based on our expectation for increased bill issuance, we no longer anticipate material downward pressure on front-end yields,” Alison Nathan, senior macro strategist at Goldman Sachs, said in a note.
Nathan pointed out that the weak outlook and the potential for more issuance of fresh Treasury bills in the U.S. is limiting the drop in yields at shorter maturities.
For more information on the fixed-income market, visit our bond ETFs category.