The yield on the 10-year U.S. Treasury was 1.69% on Sep 27, up from 1.47% recorded at the start of the month. Meanwhile, yield on three-month treasury yield dropped to 1.80% on Sep 27 from 1.98% noted on Sep 3. The spread between two- and ten-year-treasury-yield was 54 bps on Sep 3. And on Sep 27, the spread became 17 bps.
Actually, the movement of short-term bonds is more dependent on Fed behavior than long-term bonds. The Fed has already enacted one 25-bp rate cut in July and another in September and may slash rates further this year, thanks to rising slowdown fears owing to U.S.-China trade tensions and global growth worries.
Meanwhile, reports of a meeting between the United States and China in October boosted risk-on sentiments, which in turn provided a boost to the broader market. This contributed to the rise in long-term bond yields in September.
This trend of steepening yield curve has given a boost to the following ETFs in the month.
ETFs That Benefited From Steepening Yield
Barclays Inverse US Treasury Aggregate ETN
The underlying Barclays Inverse US Treasury Futures Composite Index employs a strategy that tracks the sum of the returns of periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. The fund charges 43 bps in fees (read: 5 Top & Flop ETF Areas of Q2).
Invesco KBW Bank ETF KBWB
Since banks borrow money at short-term rates and lend capital at long-term rates, steepening of the yield curve bodes well for bank ETFs.
The underlying KBW Nasdaq Bank index is a modified-market capitalization-weighted index that seeks to reflect the performance of companies that do business as banks or thrifts that are publicly-traded in the United States.
First Trust Nasdaq Bank ETF FTXO
The underlying Nasdaq US Smart Banks Index is a modified factor weighted index, designed to provide exposure to U.S. companies within the banking industry. The fund charges 60 bps in fees.
ProShares Equities for Rising Rates ETF EQRR
The underlying NASDAQ U.S. Large Cap Equities for Rising Rates Index seeks to provide relative outperformance during periods of rising U.S. Treasury interest rates, as compared to traditional U.S. large-cap indexes, such as the S&P 500. The fund charges 35 bps in fees.
SPDR S&P Regional Banking ETF (KRE)
The underlying S&P Regional Banks Select Industry Index represents the regional banks segment of the S&P Total Market Index. The fund charges 35 bps in fees.
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