U.S. Treasury exchange traded funds are rallying on European debt fears as five-year yields drop to record lows. Stock ETFs, however, are broadcasting a more optimistic outlook. So who is telling the truth — equity or Treasury ETFs?
The iShares Barclays 20+ Year Treasury ( TLT ) has gained about 3% over the past week. The bond ETF has been trading in a range since the risk-off spike over the summer and is currently hovering around its 50-day moving average.
Treasury funds were among the best-performing ETFs last year on the safety trade. However, many high-profile investors and portfolio managers have been predicting higher yields, which would hurt bond prices. [Treasury ETFs on the Precipice]
Treasury yields have been pushed to historic lows on the Eurozone debt crisis and worries over a double-dip recession.
“Overall, U.S. Treasuries are offering negative real returns, except for the long bond, when adjusted for inflation, as investors are willing to sacrifice profits for safety in today’s uncertain climate,” according to Wall Street Sector Selector.
The performance of stocks and U.S. government debt is diverging. Equities have blasted higher since the October bottom, yet Treasury yields remain stubbornly low.
“How long will U.S. Treasuries stay at this level, and will they eventually move up to reflect tentatively improving economic conditions in the United States? It all depends upon Europe. If the European situation deteriorates from here, U.S. equities will almost certainly retreat, and U.S. Treasury investors will look justified in having accepted a low yield, since it was low in anticipation of this risk. In that situation, U.S. Treasury yields could move even lower,” writes BlackRock’s Matt Tucker at the iShares blog.
“If Europe claws its way out of the worst potential outcome and gets to a point of relative stability, the liquidity premium in U.S. Treasuries will likely dissipate and yields may move to more fundamentally justified levels,” he added. “But for now, it does appear that bond market and equity market investors are making very different bets.”
iShares Barclays 20+ Year Treasury
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