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ETF Winner and Loser from a Flattening Yield Curve
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There are two influences on the U.S. Treasury bond market is right now – geopolitical risks and expectations of a Fed rate hike in mid-June. Tensions are flaring up in the Middle East as OPEC top brass Saudi Arabia and other Arab states blamed Qatar of nursing terrorism and cut their diplomatic ties with the latter (read: Stay Away from These Middle East ETFs on Gulf Rift).
Plus, snap elections in the U.K., ECB’s policy meeting and the fired Federal Bureau of Investigation Director James Comey’s testimony on June 8 have turned market participants skeptics. Several corners of the market witnessed modest sell-offs on June 6, 2017.
Investors rushed on safe havens. Yield on benchmark U.S. Treasury dropped 4 bps from the previous day to 2.14% reacting to these worries. Plus, a run of weaker-than-expected U.S. economic data dragged down benchmark bond yields to a seven-month low. iShares 20+ Year Treasury Bond (TLT - Free Report) was up over 0.5% on June 6.
However, investors across the globe are looking forward to outcome of the June 13–14 Fed meeting with traders expecting a 95.6% chance of a 25-bps hike, according to CME Group's Fed Watch. Sensing this impending hike, yields on three-month and six-month U.S. Treasury bonds went up 1 bp and 2 bps on June 6, 2017 from the day (read: Fed to Tighten Policy: Bet on These ETFs).
As a result, the short end of the yield curve is rising faster than the long end, and the spread between both the two yields is narrowing. The spread between the 2-year and 30-year yields was at 151 bps on June 6, down from 159 bps at the start of the month, indicating that the yield curve is flattening.
ETF Winner
This trend is likely to continue in the coming trading sessions, suggesting investors might want to avoid riding the yield curve or take an inverse position. This could be easily done through the only option in the broad bond ETF space – iPath US Treasury Flattener ETN .
FLAT in Focus
This product provides inverse (or opposite) exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts (read: 3 Treasury Bond ETFs to Play Rising Short Term Yields).
The index takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. It generally rises when the yield curve steepens and falls when it is flattening. As such, investors could make smart profits from the flattening of the yield curve through the ETN thanks to its inverse relation with the index.
However, investors should note that FLAT is expensive, charging 0.75% in fees and expenses, and has higher trading cost thanks to its illiquid nature. The product is unpopular too as it has amassed just $3.5 million in its asset base. The fund was up about 0.7% on June 6, 2017 (see: all the Government Bond ETFs here).
ETF Loser
The flattening of the yield curve hurt regional banks on June 6, 2017. Banks’ business model is to take in deposits and pay out short-term rates, and the lend capital back at longer term rates. As a result, a lower long-term rates do not bode well for financial stocks.
SPDR Financial Select Sector SPDR Fund (XLF - Free Report)
The $21.9-billion fund holds 67 stocks in total. The fund charges 14 bps in fees. Berkshire Hathaway Inc. Class B (11.01%), JPMorgan Chase & Co. (10.3%) and Wells Fargo & Company (8.11%) are the top three holdings. XLF was down over 0.4% on June 6, 2017.
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ETF Winner and Loser from a Flattening Yield Curve
There are two influences on the U.S. Treasury bond market is right now – geopolitical risks and expectations of a Fed rate hike in mid-June. Tensions are flaring up in the Middle East as OPEC top brass Saudi Arabia and other Arab states blamed Qatar of nursing terrorism and cut their diplomatic ties with the latter (read: Stay Away from These Middle East ETFs on Gulf Rift).
Plus, snap elections in the U.K., ECB’s policy meeting and the fired Federal Bureau of Investigation Director James Comey’s testimony on June 8 have turned market participants skeptics. Several corners of the market witnessed modest sell-offs on June 6, 2017.
Investors rushed on safe havens. Yield on benchmark U.S. Treasury dropped 4 bps from the previous day to 2.14% reacting to these worries. Plus, a run of weaker-than-expected U.S. economic data dragged down benchmark bond yields to a seven-month low. iShares 20+ Year Treasury Bond (TLT - Free Report) was up over 0.5% on June 6.
However, investors across the globe are looking forward to outcome of the June 13–14 Fed meeting with traders expecting a 95.6% chance of a 25-bps hike, according to CME Group's Fed Watch. Sensing this impending hike, yields on three-month and six-month U.S. Treasury bonds went up 1 bp and 2 bps on June 6, 2017 from the day (read: Fed to Tighten Policy: Bet on These ETFs).
As a result, the short end of the yield curve is rising faster than the long end, and the spread between both the two yields is narrowing. The spread between the 2-year and 30-year yields was at 151 bps on June 6, down from 159 bps at the start of the month, indicating that the yield curve is flattening.
ETF Winner
This trend is likely to continue in the coming trading sessions, suggesting investors might want to avoid riding the yield curve or take an inverse position. This could be easily done through the only option in the broad bond ETF space – iPath US Treasury Flattener ETN .
FLAT in Focus
This product provides inverse (or opposite) exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts (read: 3 Treasury Bond ETFs to Play Rising Short Term Yields).
The index takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. It generally rises when the yield curve steepens and falls when it is flattening. As such, investors could make smart profits from the flattening of the yield curve through the ETN thanks to its inverse relation with the index.
However, investors should note that FLAT is expensive, charging 0.75% in fees and expenses, and has higher trading cost thanks to its illiquid nature. The product is unpopular too as it has amassed just $3.5 million in its asset base. The fund was up about 0.7% on June 6, 2017 (see: all the Government Bond ETFs here).
ETF Loser
The flattening of the yield curve hurt regional banks on June 6, 2017. Banks’ business model is to take in deposits and pay out short-term rates, and the lend capital back at longer term rates. As a result, a lower long-term rates do not bode well for financial stocks.
SPDR Financial Select Sector SPDR Fund (XLF - Free Report)
The $21.9-billion fund holds 67 stocks in total. The fund charges 14 bps in fees. Berkshire Hathaway Inc. Class B (11.01%), JPMorgan Chase & Co. (10.3%) and Wells Fargo & Company (8.11%) are the top three holdings. XLF was down over 0.4% on June 6, 2017.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>