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What Does the Solid July Job Data Mean for Bond ETFs?
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U.S. Bond ETFs have been on a dream rally this year on safe haven demand. Thanks to China-led global market worries and the 12-year plunge in oil prices in Q1 and the Brexit in Q2, U.S. fixed income remained on a rallying mode even after the Fed hiked rates in December 2015 for the first time after almost a decade.
Global growth concerns buried risk-on sentiments and boosted relatively safer fixed-income securities, pulling bond yields down. In fact, post Brexit in late June, benchmark U.S. treasury bond yields fell to a four-year low (read: Global Treasury Yields Dive: Play These Sector ETFs).
However, things may change in the fixed income world, going forward. With the U.S. economy on the mend as evident from the back-to-back strong job reports for the month of June and July, questions over the fixed-income rally arise.
Inside Job Data
Investors should note that the month of July saw the addition of 255,000 new jobs, which is way above a 180,000 rise expected by analysts. Though it was lower than the upwardly-revised June job addition of 292,000, the trend remained bullish. The measly 11,000 job growth of May was also positively updated to 24,000 (read: ETFs to Buy After Strong Jobs Report).
Over the past year, average monthly job growth increased to 206,000. The unemployment rate in July remained at 4.9%. Average hourly earnings nudged up 0.3% to $25.69 in July following a 0.1% wage gain in June. Even a highly weak month like May saw 0.2% growth in average hourly rate, indicating a positive momentum building in the wage growth front.
Will Fed Hike Rates Soon?
All these point to a rebounding U.S. economy, which in turn may prompt the Fed to turn hawkish. The Fed did not go for a hike this year and thus may enact one in the near term. Also, in mid-July, Atlanta Fed President Dennis Lockhart pointed to a “quite orderly” movement in the markets (read: A Positive-But-Cautious Fed Meet: Buy These ETFs).
How Did the Bond Market React?
Though still soft inflation is an obstacle in the way of the Fed policy tightening, it seems that the investing world has started speculating a sooner-than-expected hike. As a result, yields jumped. The yield on the 10-year U.S. Treasury note rose 8 bps to 1.59%. Shorter-term, two-year U.S. Treasury bond yields also rose 8 bps to 0.72%. Even shorter 3-month and 6-month treasury yields increased 2 bps and 4 bps, respectively.
As a result, long-term U.S. bond ETF, iShares 20+ Year Treasury Bond (TLT - Free Report) , lost over 1% on August 5 – the day the job data was released – and shed about 0.02% in afterhours. iShares Short Treasury BondETF (SHV - Free Report) also shed about 0.01% on the day. Notably, bond yields and prices are inversely related.
If you are the one who is extremely cautious about rising rate risks and believes that bond bulls have lost strength, investments in the below-mentioned bond ETFs can be intriguing bets.
Inverse Bond ETFs
These bond ETFs were winners on August 5.
iPath US Treasury 10-year Bear ETN – Up 8.19% on August 5
The underlying index looks to track inverse moves in the yields from buying 10-year Treasury bonds.
iPath US Treasury Long Bond Bear ETN – Up 3.81% on August 5
Here, the underlying index looks to follow inverse moves in the yields from buying long dated Treasury bonds.
Direxion Daily 20+ Year Traesury Bear 3X ETF (TMV - Free Report) – Up 3.16% on August 5
As the yield on the 20- and 30-year U.S. Treasury notes went up 7 bps each to 1.91% and 2.32%, respectively on August 5, a downward pressure on those bond prices are self-explanatory. The fund gives triple the exposure of the ICE U.S. Treasury 20+ Year Bond Index (read: Proposed SEC Rules Could Shake Leveraged ETFs).
Negative Duration Bond ETFs
WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund – Up 2.79% on August 5
If investors are worrying about interest rate risks, negative duration bonds may come to their rescue. Plus, this fund offers substantial yields, which can easily beat out the benchmark yield. The fund yields 4.72% annually.
WisdomTree Barclays US Aggregate Bond Negative Duration ETF – Up 0.26% on August 5
The fund seeks to track the Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration. The fund yields 1.87% annually.
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What Does the Solid July Job Data Mean for Bond ETFs?
U.S. Bond ETFs have been on a dream rally this year on safe haven demand. Thanks to China-led global market worries and the 12-year plunge in oil prices in Q1 and the Brexit in Q2, U.S. fixed income remained on a rallying mode even after the Fed hiked rates in December 2015 for the first time after almost a decade.
Global growth concerns buried risk-on sentiments and boosted relatively safer fixed-income securities, pulling bond yields down. In fact, post Brexit in late June, benchmark U.S. treasury bond yields fell to a four-year low (read: Global Treasury Yields Dive: Play These Sector ETFs).
However, things may change in the fixed income world, going forward. With the U.S. economy on the mend as evident from the back-to-back strong job reports for the month of June and July, questions over the fixed-income rally arise.
Inside Job Data
Investors should note that the month of July saw the addition of 255,000 new jobs, which is way above a 180,000 rise expected by analysts. Though it was lower than the upwardly-revised June job addition of 292,000, the trend remained bullish. The measly 11,000 job growth of May was also positively updated to 24,000 (read: ETFs to Buy After Strong Jobs Report).
Over the past year, average monthly job growth increased to 206,000. The unemployment rate in July remained at 4.9%. Average hourly earnings nudged up 0.3% to $25.69 in July following a 0.1% wage gain in June. Even a highly weak month like May saw 0.2% growth in average hourly rate, indicating a positive momentum building in the wage growth front.
Will Fed Hike Rates Soon?
All these point to a rebounding U.S. economy, which in turn may prompt the Fed to turn hawkish. The Fed did not go for a hike this year and thus may enact one in the near term. Also, in mid-July, Atlanta Fed President Dennis Lockhart pointed to a “quite orderly” movement in the markets (read: A Positive-But-Cautious Fed Meet: Buy These ETFs).
How Did the Bond Market React?
Though still soft inflation is an obstacle in the way of the Fed policy tightening, it seems that the investing world has started speculating a sooner-than-expected hike. As a result, yields jumped. The yield on the 10-year U.S. Treasury note rose 8 bps to 1.59%. Shorter-term, two-year U.S. Treasury bond yields also rose 8 bps to 0.72%. Even shorter 3-month and 6-month treasury yields increased 2 bps and 4 bps, respectively.
As a result, long-term U.S. bond ETF, iShares 20+ Year Treasury Bond (TLT - Free Report) , lost over 1% on August 5 – the day the job data was released – and shed about 0.02% in afterhours. iShares Short Treasury Bond ETF (SHV - Free Report) also shed about 0.01% on the day. Notably, bond yields and prices are inversely related.
If you are the one who is extremely cautious about rising rate risks and believes that bond bulls have lost strength, investments in the below-mentioned bond ETFs can be intriguing bets.
Inverse Bond ETFs
These bond ETFs were winners on August 5.
iPath US Treasury 10-year Bear ETN – Up 8.19% on August 5
The underlying index looks to track inverse moves in the yields from buying 10-year Treasury bonds.
iPath US Treasury Long Bond Bear ETN – Up 3.81% on August 5
Here, the underlying index looks to follow inverse moves in the yields from buying long dated Treasury bonds.
Direxion Daily 20+ Year Traesury Bear 3X ETF (TMV - Free Report) – Up 3.16% on August 5
As the yield on the 20- and 30-year U.S. Treasury notes went up 7 bps each to 1.91% and 2.32%, respectively on August 5, a downward pressure on those bond prices are self-explanatory. The fund gives triple the exposure of the ICE U.S. Treasury 20+ Year Bond Index (read: Proposed SEC Rules Could Shake Leveraged ETFs).
Negative Duration Bond ETFs
WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund – Up 2.79% on August 5
If investors are worrying about interest rate risks, negative duration bonds may come to their rescue. Plus, this fund offers substantial yields, which can easily beat out the benchmark yield. The fund yields 4.72% annually.
WisdomTree Barclays US Aggregate Bond Negative Duration ETF – Up 0.26% on August 5
The fund seeks to track the Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration. The fund yields 1.87% annually.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>