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The Fed Helps Return The Treasury Bond ETF Play

As the Federal Reserve maintains a loose monetary policy to prop up the economy, long-term Treasury bonds and related ETFs could continue to maintain a decades-long bull run.

Long-term Treasury bond ETFs, such as the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ C+), Vanguard Extended Duration Treasury ETF (EDV B+) and iShares 20+ Year Treasury Bond ETF (TLT B-), have could strengthen as yields continue to pullback.

Treasuries due in 10 years or longer have returned almost 17% since December 31 after growth concerns fueled a flight to safe-haven assets and the shift in the Fed’s policy stance reignited the long-term bond trade, Bloomberg reports.

Additionally, while demand for long-term sovereigns should continue amid lingering global uncertainties like the U.S.-China trade war, a loose Fed policy could mean less downward pressure on short-term yields, which could lead to a flatter yield curve. Mizuho International Plc argued that investors could capitalize on the trend with so-called flattener trades, which profit when longer-term yields fall faster than near-maturity ones.

“There is a pretty clear return in demand for global rates duration,” Peter Chatwell, head of European rates strategy at Mizuho, told Bloomberg. “The Fed’s pause is not an end to its easing cycle, but for now it means U.S. curves can bull-flatten rather than steepen.”

Exchange traded note investors can also gain exposure to this strategy through the iPath US Treasury Flattener ETN (FLAT C). FLAT is designed to capture returns available in the U.S. Treasury yield curve environment by “flattening” the U.S. Treasury yield curve. Specifically, the iPath U.S. Treasury Flattener Exchange Traded Note reflects the daily inverse performance of the Barclays Capital U.S. Treasury 2Y/10Y Yield Curve Index, which implements a sophisticated investment strategy that allows investors to bet on the slope of the yield curve.

The level of the index increases as the yield curve steepens and decreases as the yield curve flattens. FLAT employs a strategy that seeks to make money when the two-year versus 10-year yield spread declines, taking a bearish short position on the underlying.

This article originally appeared on ETFTrends.com.

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