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Time for Long-Term Treasury Bond ETFs as Peak Rates Loom?
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Long-term U.S. treasury bond ETF iShares 20+ Year Treasury Bond ETF (TLT - Free Report) amassed about $2.44 billion in assets past month (as of Jul 16, 2023), per etf.com. On the other hand, short-term bond ETF iShares Short Treasury Bond ETF (SHV - Free Report) hauled in only $653.7 million in assets during the same time frame. This shows investors’ inclination toward long-term bond funds as the segment is likely to rule ahead. Here’s why.
Historical Outperformance
The historical performance of Treasuries maturing in 10 or more years provides an intriguing case for investors, right after the final interest-rate hike in a Fed policy tightening cycle, per Bloomberg, as quoted on Yahoo Finance. Long-term bonds have consistently outperformed shorter-dated areas in such a scenario. On average, they returned 10% over the six-month-period bonds following the peak in the federal funds rate.
While determining the last rate increase is only perceptive, investors are increasingly optimistic that the expected quarter-point hike on July 26 and a more rate hike is possible in the ongoing tightening cycle that started in March 2022.
Investor Sentiment Swing
Bank of America Corp. and JPMorgan Chase & Co. surveys divulge that investors have significantly increased their exposure to long-dated bonds in anticipation of this scenario, per that Bloomberg article. This sentiment shift was buoyed by a drop in inflation last week, which could lead the Fed to go for enact the pause faster-than-anticipated.
We all know about the greater price sensitivity of long-dated bonds to a change in yield. So, no wonder, the TLT fetched as much as $1.96 billion in assets only in last week. The fund TLT currently yields 3.01% annually.
Fears of Corporate Defaults Falling?
Investors are betting big on peaking rates also led to boost in asset generation in iShares iBoxx USD High Yield Corporate Bond ETF (HYG - Free Report) which yields about 5.67% annually, which amassed about 2.35 billion in assets past week. It means that investors are no more fearing rising rates and the resultant spike in corporate defaults.
The recent surge in defaults has been triggered by several factors, including industry-specific risks and the result of the pandemic. While high interest rates acted as a key headwind, other issues have also contributed to the challenges faced by companies. But investors preference for HYG shows that they are okay to bet big on risky high-yield bond ETFs like HYG.
Any Caveat?
Although the Federal Reserve remains watchful, with some policymakers still expecting more rate hikes, market trends suggest a likely peak is impending. The cooling inflation, which has been on a consistent decline for the past year, actually supports this view.
But there are some market watchers that the inflation may prove stickier-than-expected. It is just that the easier part of inflation reduction has been realized. If that happens and the labor markets remains strong, the Fed may continue to hike rates ahead, which may not go in favor of the long-term bond investing.
How to Tread Water If Rates Continue to Rise?
In the face of potential economic downturns or continued monetary policy tightening beyond July, long-term treasuries’ compelling hedge with high enough yields may sooth investors’ nerves. Average Yield-to-Maturity of HYG is as high as 7.99% annually, as of Jul 13, 2023 while Average Yield-to-Maturity of TLT is 4.01% annually.
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Time for Long-Term Treasury Bond ETFs as Peak Rates Loom?
Long-term U.S. treasury bond ETF iShares 20+ Year Treasury Bond ETF (TLT - Free Report) amassed about $2.44 billion in assets past month (as of Jul 16, 2023), per etf.com. On the other hand, short-term bond ETF iShares Short Treasury Bond ETF (SHV - Free Report) hauled in only $653.7 million in assets during the same time frame. This shows investors’ inclination toward long-term bond funds as the segment is likely to rule ahead. Here’s why.
Historical Outperformance
The historical performance of Treasuries maturing in 10 or more years provides an intriguing case for investors, right after the final interest-rate hike in a Fed policy tightening cycle, per Bloomberg, as quoted on Yahoo Finance. Long-term bonds have consistently outperformed shorter-dated areas in such a scenario. On average, they returned 10% over the six-month-period bonds following the peak in the federal funds rate.
While determining the last rate increase is only perceptive, investors are increasingly optimistic that the expected quarter-point hike on July 26 and a more rate hike is possible in the ongoing tightening cycle that started in March 2022.
Investor Sentiment Swing
Bank of America Corp. and JPMorgan Chase & Co. surveys divulge that investors have significantly increased their exposure to long-dated bonds in anticipation of this scenario, per that Bloomberg article. This sentiment shift was buoyed by a drop in inflation last week, which could lead the Fed to go for enact the pause faster-than-anticipated.
We all know about the greater price sensitivity of long-dated bonds to a change in yield. So, no wonder, the TLT fetched as much as $1.96 billion in assets only in last week. The fund TLT currently yields 3.01% annually.
Fears of Corporate Defaults Falling?
Investors are betting big on peaking rates also led to boost in asset generation in iShares iBoxx USD High Yield Corporate Bond ETF (HYG - Free Report) which yields about 5.67% annually, which amassed about 2.35 billion in assets past week. It means that investors are no more fearing rising rates and the resultant spike in corporate defaults.
The recent surge in defaults has been triggered by several factors, including industry-specific risks and the result of the pandemic. While high interest rates acted as a key headwind, other issues have also contributed to the challenges faced by companies. But investors preference for HYG shows that they are okay to bet big on risky high-yield bond ETFs like HYG.
Any Caveat?
Although the Federal Reserve remains watchful, with some policymakers still expecting more rate hikes, market trends suggest a likely peak is impending. The cooling inflation, which has been on a consistent decline for the past year, actually supports this view.
But there are some market watchers that the inflation may prove stickier-than-expected. It is just that the easier part of inflation reduction has been realized. If that happens and the labor markets remains strong, the Fed may continue to hike rates ahead, which may not go in favor of the long-term bond investing.
How to Tread Water If Rates Continue to Rise?
In the face of potential economic downturns or continued monetary policy tightening beyond July, long-term treasuries’ compelling hedge with high enough yields may sooth investors’ nerves. Average Yield-to-Maturity of HYG is as high as 7.99% annually, as of Jul 13, 2023 while Average Yield-to-Maturity of TLT is 4.01% annually.