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Bond ETFs Bull Run to End Finally?

Sanghamitra Saha

The dream run of the prolonged bullish bond market finally seems to be approaching its end. At least, DoubleLine Capital Chief Executive Officer Jeffrey Gundlach’s recent comments give such cues. He expects more pain in the long-dated treasury space. Hedge Funds that were bullish on long-end treasuries to the highest outright level since 2008, have started retreating lately.

Why Such Trend Is Evolving

Fed chief Yellen and ECB head Mario Draghi already sent hawkish signals for their respective monetary policies. Yellen indicated that the U.S. economy can endure higher interest rates and cautioned of rich asset valuations (read: Doves Turn Hawks: 5 Fed-Proof Bond ETFs to Buy).

Yellen also made it clear that the Fed’s gradual policy tightening and reduction of the $4.5 trillion balance sheet will remain on course. The Fed’s June meeting minutes indicated that some officials would like to see a reverse QE by the end of August. Plus, the central bank is to enact one more rate hike this year having already acted twice (read: ETF Strategies to Win if Fed's Reverse QE Hits Soon).

Mario Draghi on the other hand said that the ECB could modify its sub-zero interest rates and scale back a huge bond purchase program as the economy is on the mend. Lower inflation issues are being viewed as short-lived by Draghi, as per an article published on MarketWatch. However, any modification in the ECB’s policy is likely to be gradual (read: Hawkish Yellen, Draghi Boost These ETF Areas).

Benchmark U.S. Treasury yields touched eight-week highs on the likelihood of global monetary policy tightening. Thirty-year yields jumped seven basis points on July 6 to 2.92%, breaking both 50- and 200-day moving averages, as per Bloomberg. Across the pond, German yields reached an 18-month high.

Gundlach’s View

As per Gundlach’s emailed response to questions, 10-year Treasury yields are on their way “toward 3 percent” this year. 10-year yield at 3% would mean a “definitive” bear market for Treasuries, as per Gundlach, going by an article published on Bloomberg. The 10-year yield was 2.39% on July 6.

ETFs in Focus

U.S. Treasury bonds which delivered a decent performance in the second quarter of the year, succumbed to a sharp sell-off recently. In the last 10 trading sessions (as of July 6, 2017), U.S. Treasury bond ETFs like Vanguard Extended Duration Treasury ETF EDV, PIMCO 25+ Year Zero Coupon US Treasury ETF ZROZ, iShares 20+ Year Treasury Bond ETF TLT, iShares 10-20 Year Treasury Bond ETF TLH) and iShares 7-10 Year Treasury Bond ETF IEF lost about 4.3%, 4.7%, 3.0%, 2.1% and 1.5%, respectively.

Bottom Line

At the current level, bond bears are totally beating out the bulls in the bond market. Only geopolitical risks and a sudden slowdown in the U.S. market as well as abroad can inject fresh optimism into the space. Till then, investors may profit out of inverse bond ETFs like iPath US Treasury Long Bond Bear ETN DLBS, UltraPro Short 20+ Year Treasury ETF TTT, Direxion Daily 20+ Year Treasury Bear 1x Shares ETF TYBS and Short 20+ Year Treasury ETF TBF.

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ISHARS-20+YTB (TLT): ETF Research Reports
ISHARS-7-10YTB (IEF): ETF Research Reports
DIR-D 20+Y T BR (TYBS): ETF Research Reports
VANGD-EX DUR TR (EDV): ETF Research Reports
PIMCO-25Y ZERO (ZROZ): ETF Research Reports
IPATH-UST LB BR (DLBS): ETF Research Reports
PRO-ULT 3X20YT (TTT): ETF Research Reports
PRO-SH 20+ TBI (TBF): ETF Research Reports
ISHARS-10-20YTB (TLH): ETF Research Reports
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