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Bond ETFs in Focus as Treasury Yield Touches 3-Year Low
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U.S. Treasury yields declined yesterday, with the benchmark two-year yield falling to its lowest level since 2022 and the 10-year yield dipping below 4%, amid trade concerns and credit market worries (as reported by major news agencies, including Reuters). This sharp decline signals heightened risk aversion among investors who are seeking safety amid mounting economic uncertainty.
Against this backdrop, bond exchange-traded funds (ETFs) are increasingly attractive options for investors, as they look for stability amid the prevailing uncertainty in the U.S. economy.
Understanding the Decline in Treasury Yields and Its Impact on Bond Prices
Treasury yields tumbled due to a confluence of market stressors, including renewed credit risks in regional banks, fear of an imminent recession amid the ongoing government shutdown and dovish central bank policy, widespread anxiety over trade tensions and stock market volatility. Let us analyze these factors briefly.
The U.S. regional banking stocks performed poorly at the bourses on Oct. 16, following two banks, Zions Bancorp ((ZION - Free Report) ) and Western Alliance ((WAL - Free Report) ), disclosing significant loan losses on their part, indicating turbulence in their lending businesses. Consequently, shares of ZION and WAL suffered a loss of 13% and 11%, respectively, in the last trading session, and in a ripple effect, put downward pressure on banks at the bourses.
Meanwhile, higher tariffs imposed by the U.S. government in early 2025 have been burning the pockets of common American households. As per an exclusive new poll conducted for the Guardian, a major cohort of Americans say their monthly costs have risen between $100 and $749. This aligns with estimates from economists at the Yale Budget Lab, who projected last month that the average U.S. household would see an increase of $2,300 in annual costs due to these tariffs – roughly $191 per month.
These higher prices, coupled with the uncertainty looming around the ongoing government shutdown, have been fueling the fear of an upcoming recession for the U.S. economy among many economists. To this end, Mark Zandi of Moody’s, stated in early October that the U.S. economy is on the "precipice" of a recession, with as many as 22 states already facing recession, as reported by financial news platform Marketwatch.
All these factors, combined with the mounting volatility arising from escalated trade tensions between the United States and China over the past week, and the Federal Reserve's expectations of further rate cuts to support a weakening labor market, must have contributed to the fall in Treasury yields yesterday.
Rising political uncertainty, trade frictions, and economic headwinds, as mentioned above, have set the stage to make fixed-income instruments, such as bond ETFs, increasingly attractive. Notably, bond ETFs are often seen as “efficient shock absorbers” during periods of market stress, with their diversification and liquidity offering portfolio protection.
Another core mechanic making Bond ETFs appealing in this environment is the inverse relationship between bond prices and yields. As demand for U.S. government bonds increases, driven by the factors above, investors bid up the prices of these bonds. When a bond's market price rises, its fixed interest payments represent a smaller percentage return on the investment, which causes its yield to fall. Therefore, the current decline in Treasury yields is also a direct result of widespread appreciation in bond prices.
Bond ETFs to Watch
Let us put the spotlight on key bond ETFs that stand to benefit in the current market situation, as mentioned above, with investors expected to flock toward fixed-income assets in search of security.
This fund provides exposure to U.S. Treasury bonds with remaining maturities less than or equal to three months. It has approximately $59.14 billion in net assets.
Its average yield to maturity is 4.08%. The fund charges 9 basis points (bps) as fees.
This fund offers exposure to publicly issued U.S. Treasury Bills that have remaining maturities between 1 and 3 months. It has approximately $42.59 million worth of assets under management (AUM).
Its average yield to maturity is 4.05%. The fund charges 14 bps as fees.
This fund tracks the Bloomberg U.S. Treasury 1-3 Year Bond Index, which measures the investment return of U.S. Treasury obligations with remaining maturities between 1 and 3 years. It has approximately $27.6 billion in net assets.
Its average yield to maturity is 3.64%. The fund charges 3 bps as fees.
Image: Bigstock
Bond ETFs in Focus as Treasury Yield Touches 3-Year Low
U.S. Treasury yields declined yesterday, with the benchmark two-year yield falling to its lowest level since 2022 and the 10-year yield dipping below 4%, amid trade concerns and credit market worries (as reported by major news agencies, including Reuters). This sharp decline signals heightened risk aversion among investors who are seeking safety amid mounting economic uncertainty.
Against this backdrop, bond exchange-traded funds (ETFs) are increasingly attractive options for investors, as they look for stability amid the prevailing uncertainty in the U.S. economy.
Understanding the Decline in Treasury Yields and Its Impact on Bond Prices
Treasury yields tumbled due to a confluence of market stressors, including renewed credit risks in regional banks, fear of an imminent recession amid the ongoing government shutdown and dovish central bank policy, widespread anxiety over trade tensions and stock market volatility. Let us analyze these factors briefly.
The U.S. regional banking stocks performed poorly at the bourses on Oct. 16, following two banks, Zions Bancorp ((ZION - Free Report) ) and Western Alliance ((WAL - Free Report) ), disclosing significant loan losses on their part, indicating turbulence in their lending businesses. Consequently, shares of ZION and WAL suffered a loss of 13% and 11%, respectively, in the last trading session, and in a ripple effect, put downward pressure on banks at the bourses.
Meanwhile, higher tariffs imposed by the U.S. government in early 2025 have been burning the pockets of common American households. As per an exclusive new poll conducted for the Guardian, a major cohort of Americans say their monthly costs have risen between $100 and $749. This aligns with estimates from economists at the Yale Budget Lab, who projected last month that the average U.S. household would see an increase of $2,300 in annual costs due to these tariffs – roughly $191 per month.
These higher prices, coupled with the uncertainty looming around the ongoing government shutdown, have been fueling the fear of an upcoming recession for the U.S. economy among many economists. To this end, Mark Zandi of Moody’s, stated in early October that the U.S. economy is on the "precipice" of a recession, with as many as 22 states already facing recession, as reported by financial news platform Marketwatch.
All these factors, combined with the mounting volatility arising from escalated trade tensions between the United States and China over the past week, and the Federal Reserve's expectations of further rate cuts to support a weakening labor market, must have contributed to the fall in Treasury yields yesterday.
Rising political uncertainty, trade frictions, and economic headwinds, as mentioned above, have set the stage to make fixed-income instruments, such as bond ETFs, increasingly attractive. Notably, bond ETFs are often seen as “efficient shock absorbers” during periods of market stress, with their diversification and liquidity offering portfolio protection.
Another core mechanic making Bond ETFs appealing in this environment is the inverse relationship between bond prices and yields. As demand for U.S. government bonds increases, driven by the factors above, investors bid up the prices of these bonds. When a bond's market price rises, its fixed interest payments represent a smaller percentage return on the investment, which causes its yield to fall. Therefore, the current decline in Treasury yields is also a direct result of widespread appreciation in bond prices.
Bond ETFs to Watch
Let us put the spotlight on key bond ETFs that stand to benefit in the current market situation, as mentioned above, with investors expected to flock toward fixed-income assets in search of security.
iShares 0-3 Month Treasury Bond ETF ((SGOV - Free Report) )
This fund provides exposure to U.S. Treasury bonds with remaining maturities less than or equal to three months. It has approximately $59.14 billion in net assets.
Its average yield to maturity is 4.08%. The fund charges 9 basis points (bps) as fees.
SPDR Bloomberg 1-3 Month T-Bill ETF ((BIL - Free Report) )
This fund offers exposure to publicly issued U.S. Treasury Bills that have remaining maturities between 1 and 3 months. It has approximately $42.59 million worth of assets under management (AUM).
Its average yield to maturity is 4.05%. The fund charges 14 bps as fees.
Vanguard Short-Term Treasury ETF ((VGSH - Free Report) )
This fund tracks the Bloomberg U.S. Treasury 1-3 Year Bond Index, which measures the investment return of U.S. Treasury obligations with remaining maturities between 1 and 3 years. It has approximately $27.6 billion in net assets.
Its average yield to maturity is 3.64%. The fund charges 3 bps as fees.
Schwab Short-Term U.S. Treasury ETF ((SCHO - Free Report) )
This fund tracks the price and yield performance of the Bloomberg US Treasury 1-3 Year Index. It has approximately $11.45 billion in total net assets.
Its average yield to maturity is 3.78%. The fund charges 3 bps as fees.