Treasury Bond ETFs Strengthen Despite Hawkish Fed Comments
Despite selling off at the end of last week in response to speculation that the Federal Reserve would raise interest rates this year, U.S. Treasury bonds and related exchange traded funds pushed higher Monday as foreign demand may still support the relatively more attractive U.S. bond market.
On Monday, the iShares 20+ Year Treasury Bond ETF (TLT) gained 0.8%, PIMCO 25+ Year Zero Coupon US Treasury (ZROZ) increased 1.1% and Vanguard Extended Duration Treasury ETF (EDV) rose 1.2%.
Meanwhile, yields on benchmark 10-year Treasury notes dipped to 1.539% and yields on 30-year Treasury bonds fell to 2.24% on Monday – yields and bond prices have an inverse relationship, so a falling yield corresponds with rising prices.
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Minutes from the Federal Open market Committee’s July meeting revealed that members believe more data was needed before changing its monetary policy. Federal Reserve Vice Chair Stanley Fischer, though, recently hinted that a rate hike is still on the table before the end of the year.
Federal funds futures showed options traders anticipate an almost 50% chance the Fed could hike rates in December.
While all this higher rate expectation should weigh on the U.S. bond market, overseas demand may continue to support Treasuries as many foreign investors may find U.S. yields much more attractive then the paltry returns in their markets.
“As long as the yen doesn’t weaken materially again the dollar, we’ll still see good overseas demand for Treasurys,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, told the Wall Street Journal.
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For instance, yields on 10-year Japanese Government bonds were at -0.09% and yields on 10-year German bunds were at -0.09%. The value of negative-yielding bonds rose to $13.4 trillion this month as negative rates and central bank bond purchases upend the debt market, the Financial Times reported.
“It’s surreal,” Gregory Peters, senior investment officer at Prudential Fixed Income, told the Financial Times. “It’s clear that central banks are dominating markets. There’s a race to the bottom. Central banks are the main drivers of this, it’s not fundamental.”
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Even if the Fed raises rates and puts pressure on Treasury bonds, foreign demand may still jump at the relatively more attractive U.S. government debt.
For more information on the Treasuries market, visit our Treasury bonds category.
iShares 20+ Year Treasury Bond ETF
