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Short-Term Treasury ETFs in Focus on Dip in Two-Year Yield
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U.S. government yields spiraled down on Jan 3, after the weaker-than-expected reading on manufacturing activity ignited fears that U.S. economic growth is showing signs of slowing down. The U.S. two-year treasury note briefly dropped below the 2.4% level in the afternoon session of Jan 3, reaching parity with the fed funds effective rate for the first time since 2008.
In late afternoon trade, the three- and five-year note yields had also dropped below 2.4%. The fed funds effective rate, currently set at 2.4%, moves within the fed’s key policy range of 2.25-2.5%. The two-year Treasury yield fell to its lowest since May 30.
Per a report released by the Institute of Supply Management (ISM), Washington’s factory activity fell to 54.1 from 59.3 in November—marking the biggest drop since October 2008. Reading of 54.1 is also the lowest since November 2016.
Even though a reading of above 50 signals an expansion in activity, it appears that Wall Street has taken this worse-than-expected data as another sign of impending slowdown in U.S. gross domestic production.
The market move suggests that the Fed would need to stop its three-year rate hiking cycle, after hiking rates four times in 2018. Per Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, the present market situation is effectively communicating that at some point in the next 24-months, the Fed not only would need to stop hiking rates, but also need to adopt monetary easing practices.
Per Quincy Krosby, Chief Marketing Strategist at Prudential Financial, two-year yield is closely aligned with the flow of economic data and what the Fed is going to do. He added, that the economic data releases and Apple’s revenue warning suggest a global economic slowdown, with the United States also entering that category.
Apple APPL cut its fourth-quarter revenue forecast for the first time in more than 15 years, prompted by slowing sales in China and fewer iPhone upgrades due to trade tensions with China and weakness in emerging markets. Also, China’s economy entered into the contraction phase in December 2018 for the first time in more than two years. This slowdown in the world’s second largest economy is spilling over in other Asian economies. Such weak reports are causing widespread panic in the global markets (read: Apple Tanks, Lowers Q4 Revenue Outlook: Tech ETFs in Focus).
ETFs in Focus
While most economists are not forecasting a global economic recession, disappointing data releases are telling a different story. It could also be that the markets are too bearish as the U.S. economy still looks upbeat. However, the political unrest in the United States and signs of global economic slowdown will definitely increase the appeal of safe haven. Against this backdrop, we highlight the popular short-term treasury bond ETFs in detail (see: all the Government Bond ETFs here):
The fund tracks the investment results of the ICE U.S. Treasury 1-3 Year Bond Index composed of U.S. Treasury bonds with remaining maturities between one and three years. It comprises 69 holdings with 1-2 year bonds and 2-3 years bonds having 54.9% and 44.8%, allocation respectively. The fund has a weighted average maturity of 1.95 years and an effective duration of 1.89 years. Its AUM is $20.7 billion and expense ratio is 0.15%. It has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Most Loved and Hated ETFs of 2018).
The fund tracks the Barclays U.S. 1-3 Year Government Float Adjusted Index and comprises 94 holdings. It has an average effective maturity of 2.0 years and an average duration of 1.9 years. The fund’s AUM is $5.5 billion and expense ratio is 0.07%. It has a Zacks ETF Rank #4 with a Medium risk outlook.
The fund tracks the Barclays Capital U.S. 1-3 Year Treasury Bond Index. The index includes all publicly issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years- are rated investment grade- and have $300 million or more of outstanding face value. It comprises 83 holdings. The fund’s weighted average maturity and effective duration is 2.0 years and 1.93 years, respectively. Its AUM is $4.3 billion and expense ratio is 0.06%. It has a Zacks ETF Rank #4 with a Medium risk outlook.
The fund tracks the Bloomberg Barclays 1-3 Year U.S. Treasury Index and comprises 100 holdings. It has an average maturity of 1.99 years and a option adjusted duration of 1.92 years. The fund’s AUM is $917 million and expense ratio is 0.06%. It carries a Zacks ETF Rank #3 (Hold).
PIMCO 1-3 Year U.S. Treasury Index Fund
The fund tracks the BofA Merrill Lynch 1-3 Year US Treasury Index and comprises 25 holdings. It has effective maturity and effective duration of 1.91 years and 1.85 years, respectively. The fund’s AUM is $55.3 million and expense ratio is 0.16%. It has a Zacks ETF Rank #4 with a Medium risk outlook.
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Short-Term Treasury ETFs in Focus on Dip in Two-Year Yield
U.S. government yields spiraled down on Jan 3, after the weaker-than-expected reading on manufacturing activity ignited fears that U.S. economic growth is showing signs of slowing down. The U.S. two-year treasury note briefly dropped below the 2.4% level in the afternoon session of Jan 3, reaching parity with the fed funds effective rate for the first time since 2008.
In late afternoon trade, the three- and five-year note yields had also dropped below 2.4%. The fed funds effective rate, currently set at 2.4%, moves within the fed’s key policy range of 2.25-2.5%. The two-year Treasury yield fell to its lowest since May 30.
Per a report released by the Institute of Supply Management (ISM), Washington’s factory activity fell to 54.1 from 59.3 in November—marking the biggest drop since October 2008. Reading of 54.1 is also the lowest since November 2016.
Even though a reading of above 50 signals an expansion in activity, it appears that Wall Street has taken this worse-than-expected data as another sign of impending slowdown in U.S. gross domestic production.
The market move suggests that the Fed would need to stop its three-year rate hiking cycle, after hiking rates four times in 2018. Per Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, the present market situation is effectively communicating that at some point in the next 24-months, the Fed not only would need to stop hiking rates, but also need to adopt monetary easing practices.
Per Quincy Krosby, Chief Marketing Strategist at Prudential Financial, two-year yield is closely aligned with the flow of economic data and what the Fed is going to do. He added, that the economic data releases and Apple’s revenue warning suggest a global economic slowdown, with the United States also entering that category.
Apple APPL cut its fourth-quarter revenue forecast for the first time in more than 15 years, prompted by slowing sales in China and fewer iPhone upgrades due to trade tensions with China and weakness in emerging markets. Also, China’s economy entered into the contraction phase in December 2018 for the first time in more than two years. This slowdown in the world’s second largest economy is spilling over in other Asian economies. Such weak reports are causing widespread panic in the global markets (read: Apple Tanks, Lowers Q4 Revenue Outlook: Tech ETFs in Focus).
ETFs in Focus
While most economists are not forecasting a global economic recession, disappointing data releases are telling a different story. It could also be that the markets are too bearish as the U.S. economy still looks upbeat. However, the political unrest in the United States and signs of global economic slowdown will definitely increase the appeal of safe haven. Against this backdrop, we highlight the popular short-term treasury bond ETFs in detail (see: all the Government Bond ETFs here):
iShares 1-3 Year Treasury Bond ETF (SHY - Free Report)
The fund tracks the investment results of the ICE U.S. Treasury 1-3 Year Bond Index composed of U.S. Treasury bonds with remaining maturities between one and three years. It comprises 69 holdings with 1-2 year bonds and 2-3 years bonds having 54.9% and 44.8%, allocation respectively. The fund has a weighted average maturity of 1.95 years and an effective duration of 1.89 years. Its AUM is $20.7 billion and expense ratio is 0.15%. It has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Most Loved and Hated ETFs of 2018).
Vanguard Short-Term Treasury ETF (VGSH - Free Report)
The fund tracks the Barclays U.S. 1-3 Year Government Float Adjusted Index and comprises 94 holdings. It has an average effective maturity of 2.0 years and an average duration of 1.9 years. The fund’s AUM is $5.5 billion and expense ratio is 0.07%. It has a Zacks ETF Rank #4 with a Medium risk outlook.
Schwab Short-Term U.S. Treasury ETF (SCHO - Free Report)
The fund tracks the Barclays Capital U.S. 1-3 Year Treasury Bond Index. The index includes all publicly issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years- are rated investment grade- and have $300 million or more of outstanding face value. It comprises 83 holdings. The fund’s weighted average maturity and effective duration is 2.0 years and 1.93 years, respectively. Its AUM is $4.3 billion and expense ratio is 0.06%. It has a Zacks ETF Rank #4 with a Medium risk outlook.
SPDR Portfolio Short Term Treasury ETF (SPTS - Free Report)
The fund tracks the Bloomberg Barclays 1-3 Year U.S. Treasury Index and comprises 100 holdings. It has an average maturity of 1.99 years and a option adjusted duration of 1.92 years. The fund’s AUM is $917 million and expense ratio is 0.06%. It carries a Zacks ETF Rank #3 (Hold).
PIMCO 1-3 Year U.S. Treasury Index Fund
The fund tracks the BofA Merrill Lynch 1-3 Year US Treasury Index and comprises 25 holdings. It has effective maturity and effective duration of 1.91 years and 1.85 years, respectively. The fund’s AUM is $55.3 million and expense ratio is 0.16%. It has a Zacks ETF Rank #4 with a Medium risk outlook.
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 >>