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Treasury ETFs Rally on Falling Inflation Expectation

Sweta Killa

The stock market is enjoying all-time highs no doubt, but the simultaneous rally in the fixed income market is also worth noting. This phenomenon is not common as both the stock and fixed income markets are inversely correlated to each other. This is because risk-on trade sent the stocks higher while risk-off pushed bonds higher.  

Hopes of strong earnings and a dovish Fed triggered a rally in the global stocks while at the same time growing Washington turmoil and muted inflation took investors to safety. U.S. consumer price remained flat in June against the expectation of a 0.2% increase, signaling doubts over the third rate hike this year. This represents year-over year growth of 1.6%, the smallest gain since October 2016, after a rise of 1.9% in May.  

In her latest testimony, Fed Chair Janet Yellen stated that she is not in a rush to raise interest rates given lower inflationary pressure. It will continue to follow a gradual rate hike plan and unwinding of its massive balance sheet. Per the central bank, the interest rates are close to the neutral level – a level that neither encourages nor discourages economic activity. The current target for the funds rate is 1-1.25% while inflation is around 1.4%, implying that the real rate close to zero, according to CNBC (read: Dovish Yellen Testimony to Boost These ETFs).

Concerns over inflation expectation and the dovish comments gave a fresh lease of life to the bond markets, especially long-term Treasuries. In fact, yields on 10-Year Treasury note fell nearly 9 bps to 2.23% while 2-Year Treasury yields tumbled two bps to 1.34% resulting in flattening of the yield curve. The spread between the yields of the 2-Year and 10-Year Treasury notes narrowed to 89 bps. The trend confirms the bullishness in long-term Treasuries.

Further, the last week’s failure of Republican efforts to pass health-care legislation has started to cast doubt on the government debt-ceiling impasse in October. This concern is also fueling a rally in Treasuries.   

Given this, long-term Treasury bond ETFs has been on the rise over the past 10 days and will likely continue to do so at least for the near term. As such, we have highlighted some solid picks for investors betting on falling inflation expectation and Fed’s dovish view. Though most of these funds have an unfavorable Zacks ETF Rank of 4 (Sell) or 5 (Strong Sell), they look interesting especially for the near term (read: Bond ETFs Bull Run to End Finally?):

PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ

This ETF follows the BofA Merrill Lynch Long Treasury Principal STRIPS Index and holds 20 securities in its basket. Both effective maturity and effective duration of the fund are 27.40 years. This fund has a decent level of $165.8 million in AUM while sees light average daily volume of 23,000 shares. It charges 15 bps in annual fees and gained 3.5% over the past 10 days.

Vanguard Extended Duration Treasury ETF EDV

This fund provides exposure to the long-term Treasury STRIPS market by tracking the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. It holds 78 bonds in total with effective maturity of 25.0 years and average duration of 24.6 years. Expense ratio comes in at 0.07%. The product has amassed $579.7 million in its asset base while sees moderate volume of 55,000 shares per day on average. It has gained 3.2% in the same time frame.

iShares 20+ Year Treasury Bond ETF TLT

This is the most popular and liquid ETF in the long-dated bond space with AUM of over $7.6 billion and average daily volume of 8.5 million shares. It tracks the ICE U.S. Treasury 20+ Year Bond Index, holding 33 securities in its basket. The fund has an average maturity of 26.17 years and effective duration of 17.58 years. It charges 15 bps in fees per year and added 2.4% in the same time frame (read: 6 ETFs to Buy if Global Tensions Flare Up).

SPDR Bloomberg Barclays Long Term Treasury ETF TLO

This fund tracks the performance of the Bloomberg Barclays Long U.S. Treasury Index and holds 48 bonds in its basket. Average maturity and modified duration come in at 25.05 years and 17.60 years, respectively. TLO has accumulated $562.9 million in its asset base while trading in moderate volumes of 66,000 shares a day on average. It charges 10 bps in annual fees and gained 2.3% over the past 10 days.

Vanguard Long-Term Government Bond ETF VGLT

With AUM of $487 million, this fund follows the Barclays Capital U.S. Long Government Float Adjusted Index. It holds 71 bonds in its basket with average maturity of 24.8 years and average duration of 17.4 years. The ETF trades in moderate volumes of around 97,000 shares and has 0.07% in expense ratio. The product is up 2.3% in the same time frame (see: all the Government Bond ETFs here).


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ISHARS-20+YTB (TLT): ETF Research Reports
VANGD-LT GOV BD (VGLT): ETF Research Reports
VANGD-EX DUR TR (EDV): ETF Research Reports
PIMCO-25Y ZERO (ZROZ): ETF Research Reports
SPDR-BBC LT TRS (TLO): ETF Research Reports
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