U.S. Treasury yields have been somewhat seesawing as a multitude of factors impact the markets at the moment. The economy registered strong jobs growth in February, while wage growth has been soft (read: 6 Sector ETFs to Win on Strong February Job Data).
Initially, Treasury yields scaled higher on strength in jobs data, only to fall following strong demand for government debt auctions. Widening budget deficits owing to President Trump’s tax reform and an increase in government spending have driven government debt issuance to record highs. Bond prices move inverse to bond yields.
What’s Moving Yields?
The U.S. economy added 313,000 jobs in February — the highest since July 2016 — compared with a Reuters forecast of 200,000. However, tepid wage growth reduced fears of an aggressive rate hiking spree by the Fed. Average hourly earnings in the United States grew a mere 0.1% in February compared with 0.3% in the previous month (read: 3 ETFs to Benefit as Faster Rate Hike Worries Cool Down).
The jobs data strength overshadowed the weakness in wage growth and led to a rally in Treasury yields. However, this was short lived as yields declined after two auctions for government bonds received strong demand, with around $50 billion of notes sold on Mar 12. The Treasury Department auctioned $28 billion in 3-year notes at a yield of 2.436% and $21 billion in 10-year notes at a yield of 2.889%.
Per a Market Watch article, CME’s Fed watch tool predicts three rate hikes for the year and that there is a 35% probability of four hikes in 2018. The markets will be closely watching the U.S. inflation report due on Tuesday to gain more information on where interest rates might be headed. In case inflation is way above market expectations, the probability of a greater number of rate hikes than earlier anticipated will increase.
“Tuesday’s core-CPI release will undoubtedly be the tone-setting event for the next several weeks in the Treasury market, or at least until the FOMC updates the dot-plot next Wednesday,” per a Market Watch article citing Ian Lyngen and Aaron Kohli, fixed-income strategists at BMO Capital Markets.
Let us now discuss a few ETFs focused on providing exposure to U.S. Treasuries (see all Government Bond ETFs here).
iShares 7-10 Year Treasury Bond ETF (IEF - Free Report)
This fund seeks to provide exposure to intermediate term U.S. Treasury bonds.
With $8.5 billion in AUM, it charges a fee of 15 basis points a year. It has an effective duration of 7.56 years and a weighted average maturity of 8.37 years. The fund has returned 0.1% in a year but lost 2.9% year to date. IEF has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
iShares U.S. Treasury Bond ETF (GOVT - Free Report)
This fund seeks to provide exposure to U.S. Treasury bonds in a wide-maturity spectrum.
It has AUM of $5.4 billion and charges a fee of 15 basis points a year. It has an effective duration of 5.96 years and a weighted average maturity of 7.49 years. The fund has returned 0.6% in a year but lost 1.9% year to date. GOVT has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Vanguard Intermediate-Term Government Bond ETF (VGIT - Free Report)
This fund seeks to provide exposure to U.S. Treasury bonds in the five-10 years maturity spectrum.
It has AUM of $1.7 billion and charges a fee of 7 basis points a year. It has an average duration of 5.2 years and an average effective maturity of 5.6 years. The fund has returned 0.1% in a year but lost 1.8% year to date. VGIT has a Zacks ETF Rank #3 with a Medium risk outlook.
iShares 10-20 Year Treasury Bond ETF (TLH - Free Report)
This fund seeks to provide exposure to longer-term U.S. Treasury bonds in the 10-20 year maturity horizon.
It has AUM of $520.7 million and charges a fee of 15 basis points a year. It has an effective duration of 10.61 years and a weighted average maturity of 14.63 years. The fund has returned 0.7% in a year but lost 4.0% year to date. TLH has a Zacks ETF Rank #4 with a High risk outlook.
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