This Long Duration Treasury ETF Could Reward Patient Investors

Patience is required when embracing long-dated bonds and corresponding exchange traded funds. In standard market environments, intraday price action for long duration Treasurys usually isn’t breathtaking. Nor are investors expecting it to be.

However, with interest rates forecast to decline this year, the outlook for ETFs such as the BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF (XTWY) is potentially more attractive than it was in 2022 and 2023. The fund holds U.S. government debt with maturities of 20 years or more. Those bonds are highly sensitive to changes in interest rates.

XTWY, which turns two years old in September, compensates investors for the rate risk associated with long duration bonds. That’s confirmed by the ETF’s 30-day SEC yield of 4.21%. That’s all the more alluring when considering credit risk is minimal with XTWY.

Excellent Outlook for XTWY

The January reading of the Consumer Price Index (CPI) confirmed inflation remains high. That indicates the Federal Reserve may have to delay rate-cutting plans. Some market observers still believe rates will fall this year, potentially providing support for funds such as XTWY.

“At the longer end of the curve, we project that the yield on the 10-year U.S. Treasury will decline and average 3.60% in 2024,” noted Morningstar’s Dave Sekera. “We project the yield will decline even further in 2025 and average 2.75%. As interest rates decline, investors will not only earn the currently high interest rates but will also benefit from additional price appreciation on bonds with longer maturities.”

XTWY could merit attention for other reasons. First, as yields on short-term bonds decline and those bonds mature, investors have the option of buying newly issued short-term debt. But with lower yields. Income-hungry market participants may be more inclined to embrace higher-yielding fare such as XTWY.

Second, if 10-year yields decline in earnest, so will the yields on cash. That would make related instruments less attractive to income investors. Some of those market participants might embrace ETFs such as XTWY to be compelling alternatives to money markets. Additionally, rates are high enough today to suggest that rate-cutting could last well into next year, perhaps providing a foundation for long-running upside for XTWY.

“We forecast that the Fed will lower the federal-funds rate at its March 2024 meeting and continue to cut rates further to approximately 3.75% by the end of the year,” added Sekera. “We further project that the Fed [will]continue cutting rates, dropping to 2.25% by the end of 2025. While short-term rates are currently high, those rates will decline in relation to the federal-funds rate, and as short-term debt matures, investors will be left with the option to reinvest in lower rates.”

For more news, information, and analysis, visit the US Treasuries & TIPS Fixed Income Channel.