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A Rare Bullish Call on U.S. Treasuries: ETFs to Play
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Key Takeaways
Jim Bianco sees value in Treasuries as yields climb above 5%, per Bloomberg, quoted on Yahoo Finance.
Short-term Treasury ETFs like VGSH and SHV offer income with a relatively low rate risk.
Total market bond ETF BND provides diversified bond exposure with a low 0.03% expense ratio.
After years of staying cautious on U.S. government bonds, veteran market watcher Jim Bianco is finally seeing a buying opportunity. With Treasury yields climbing to levels not seen in nearly two decades, Bianco believes bonds are beginning to offer an attractive risk-reward setup, per Bloomberg, as quoted on Yahoo Finance.
“This is a value play,” said Bianco, president and founder of Bianco Research. Bianco added that he plans to keep adding exposure if yields move even higher.
Why Bonds Have Come Under Pressure
The Treasury selloff has intensified as investors grapple with several concerns at once. Higher energy prices, persistent U.S. fiscal deficits, stubborn inflation and a still-resilient economy have all worked against bonds. Heavy spending on artificial intelligence (AI) infrastructure has added another layer of concern about economic growth and inflation.
The pressure was evident Monday, when the 10-year Treasury yield jumped to 5.27%, its highest level since 2007. Rising oil prices have also strengthened expectations that the Federal Reserve could keep interest rates higher for longer.
Yields Above 5% Change the Equation
Bianco acknowledges that the bond selloff may not be over. Still, he believes yields above 5% across much of the Treasury curve provide enough income cushion to make a gradual building of position worthwhile.
Bianco argues that investor sentiment has become excessively negative toward bonds. In his view, buying Treasuries at yields around 5.2% provides a meaningful income buffer even if yields rise further. iShares 7-10 Year Treasury Bond ETF (IEF - Free Report) now yields 4.11% annually and charges 15 bps in fees. The fund is off 6.8% this year.
Better Bond Math for Investors
Bianco has been bearish on Treasuries since 2020, when the 10-year yield fell to roughly 0.3% during the pandemic. At those extremely low yields, there was little room for rates to fall further and provide meaningful price gains.
Today, the setup looks very different. The potential payoff becomes more attractive if yields reverse course. A one-percentage-point rise in yields could result in a loss of less than 2% currently, while a similar decline could produce a return of roughly 13%, as mentioned in the same Bloomberg article.
A Gradual Bet, Not a Big Gamble
Bianco isn't calling for an immediate bond rally or recommending that investors rush into Treasuries. Instead, he favors adding exposure gradually as yields rise.
Short-term treasuries also look like smart bets. iShares 0-1 Year Treasury Bond ETF (SHV - Free Report) yields 3.69% annually and charges 15 bps in fees. SHV is flat this year.
Vanguard Short-Term Treasury ETF (VGSH - Free Report) yields 3.80% annually and charges 3 bps in fees. The fund is off 2% this year while it added about $4.4 billion in assets over the past month, per ETF Central data.
Investors can also try total market bond ETFs like Vanguard Total Bond Market ETF (BND - Free Report) . The fund amassed about $2.84 billion in assets over the past month. It charges 3 bps in fees and yields 4.14% annually.
Bottom Line
After years of unattractive yields, Treasuries are finally offering enough income to provide investors with a larger cushion against further rate increases.
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A Rare Bullish Call on U.S. Treasuries: ETFs to Play
Key Takeaways
After years of staying cautious on U.S. government bonds, veteran market watcher Jim Bianco is finally seeing a buying opportunity. With Treasury yields climbing to levels not seen in nearly two decades, Bianco believes bonds are beginning to offer an attractive risk-reward setup, per Bloomberg, as quoted on Yahoo Finance.
“This is a value play,” said Bianco, president and founder of Bianco Research. Bianco added that he plans to keep adding exposure if yields move even higher.
Why Bonds Have Come Under Pressure
The Treasury selloff has intensified as investors grapple with several concerns at once. Higher energy prices, persistent U.S. fiscal deficits, stubborn inflation and a still-resilient economy have all worked against bonds. Heavy spending on artificial intelligence (AI) infrastructure has added another layer of concern about economic growth and inflation.
The pressure was evident Monday, when the 10-year Treasury yield jumped to 5.27%, its highest level since 2007. Rising oil prices have also strengthened expectations that the Federal Reserve could keep interest rates higher for longer.
Yields Above 5% Change the Equation
Bianco acknowledges that the bond selloff may not be over. Still, he believes yields above 5% across much of the Treasury curve provide enough income cushion to make a gradual building of position worthwhile.
Bianco argues that investor sentiment has become excessively negative toward bonds. In his view, buying Treasuries at yields around 5.2% provides a meaningful income buffer even if yields rise further. iShares 7-10 Year Treasury Bond ETF (IEF - Free Report) now yields 4.11% annually and charges 15 bps in fees. The fund is off 6.8% this year.
Better Bond Math for Investors
Bianco has been bearish on Treasuries since 2020, when the 10-year yield fell to roughly 0.3% during the pandemic. At those extremely low yields, there was little room for rates to fall further and provide meaningful price gains.
Today, the setup looks very different. The potential payoff becomes more attractive if yields reverse course. A one-percentage-point rise in yields could result in a loss of less than 2% currently, while a similar decline could produce a return of roughly 13%, as mentioned in the same Bloomberg article.
A Gradual Bet, Not a Big Gamble
Bianco isn't calling for an immediate bond rally or recommending that investors rush into Treasuries. Instead, he favors adding exposure gradually as yields rise.
Short-term treasuries also look like smart bets. iShares 0-1 Year Treasury Bond ETF (SHV - Free Report) yields 3.69% annually and charges 15 bps in fees. SHV is flat this year.
Vanguard Short-Term Treasury ETF (VGSH - Free Report) yields 3.80% annually and charges 3 bps in fees. The fund is off 2% this year while it added about $4.4 billion in assets over the past month, per ETF Central data.
Investors can also try total market bond ETFs like Vanguard Total Bond Market ETF (BND - Free Report) . The fund amassed about $2.84 billion in assets over the past month. It charges 3 bps in fees and yields 4.14% annually.
Bottom Line
After years of unattractive yields, Treasuries are finally offering enough income to provide investors with a larger cushion against further rate increases.