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Treasury Bond ETFs Don’t Look Frothy


Treasury bonds exchange traded funds have strengthened this year, opposing calls for rising rates at the start of the year, and there may not be enough irrational behavior to justify a swift correction.

The Vanguard Extended Duration Treasury ETF (EDV) , which has an effective duration of 25.4 years and a 3.29% 30-day SEC yield, has gained 24.7% year-to-date. The iShares 7-10 Year Treasury Bond ETF (IEF) , which has a 7.56 year duration and a 2.27% 30-day SEC yield, is up 5.8% so far this year. [Treasury ETFs Keep Shining]

Treasury bonds have strengthened this year as benchmark 10-year note yields dipped below 2.5% from about 3% at the start of the year. Yields on 10-year Treasuries currently sit around 2.554%. Among strategists and analysts, many don’t see a bubble that is about to burst.

“For there to be a bubble, there has to be irrational behaviour,” Steven Major, global head of fixed income research at HSBC, said in a Financial Times article. “I don’t see people borrowing to buy bonds – and I don’t think values are far from fundamentals.”

Supporting the high demand for Treasuries, investors have turned to safe-haven assets in light of recent geopolitical risks, notably the ongoing conflict in Ukraine and escalating tensions with Russia.

Additionally, the loose monetary policies, international glut in savings and stubbornly weak global growth have also helped push investors toward U.S. government bonds.

“We are unlikely to see US bond yields rise in isolation; we should expect a synchronized move higher once the global economy is fully recovering,” Zach Pandl, portfolio manager at Columbia Management, said in the article.

Some investors, though, are worried that the historically low rates in a rising inflationary environment could translate to lower or even negative real rate returns. Investors can hedge inflation through Treasury Inflation Protected Securities, such as the iShares TIPS Bond ETF (TIP) . TIP, which track government bonds whose face value rises with inflation, has a 7.74 year duration and a 3.75% 30-day SEC yield. The fund is up 6.5% year-to-date. [Fight Back Against Inflation with TIPS ETFs]

Vanguard Extended Duration Treasury ETF


For more information on the Treasuries market, visit our Treasury bonds category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.