Home etftrends.com Getting Cautious on Treasuries When Adding Exposure to U.S. Debt

Getting Cautious on Treasuries When Adding Exposure to U.S. Debt


This year, ETF investors have also exhibited a greater willingness to gain exposure to U.S. debt. For example, the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) and the iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) have seen year-to-date inflows of $1.87 billion and $2.45 billion.

In the current market environment, many anticipate the Federal Reserve to step back from its tightening monetary policy. The policymakers’ median rate expectations for 2019 dipped to two interest rate hikes from three in response to the latest “dot plot” projections due to a softer growth and inflation outlook.

“U.S. Treasury yields dropped sharply in March, breaking out of the tight range they had traded in early this year,” said BlackRock in a recent note. “Could yields head lower still, extending the rally in Treasury prices? We take a cautious short-term stance, and see recent moves as excessive. Yet we still like U.S. Treasuries for their key role as portfolio diversifiers.”

Some observers have warned that government bond yields could jump if foreigners dumped U.S. debt holdings, which would in turn push up costs of other debt throughout the economy, like mortgages and business loans, hampering U.S. growth.

Falling Yields

Five-year yields have risen a bit this month, but still remain well below the early March highs as expectations that the Federal Reserve will hold off on raising interest rates this year push bond prices higher.

“A major factor fueling the rally in Treasury prices: Market reaction to the Federal Reserve’s dovish pivot this year, with the central bank indicating its rate hike pause could be an extended one,” said BlackRock. “Yet we believe market expectations of Fed policy have become too dovish. Markets have swung from pricing in two quarter-percentage-point Fed rate increases between fall 2018 through the end of 2020 to now pricing in two decreases by the end of 2020.”

Those who are more wary of interest rate risks can move down the yield curve and pick out short-term Treasury exposures through ETFs options like the iShares Short Treasury Bond ETF (NASDAQ: SHV) and iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY).

“We prefer shorter-dated bonds and allocations to inflation-protected securities, amid the likelihood of a steeper yield curve and higher market-based inflation expectations,” according to BlackRock.

For more information on the fixed-income market, visit our bond ETFs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

newETFs.io respects the hard work of others and gives all credit to the remarkable folks at ETFTrends.com. This excerpt/article was pulled from their RSS feed; click here to view the original. Please note that on occasion, the RSS feed will not have the author. When this happens this site defaults the author to "News". Make no mistake, this excerpt/article was not created by newETFs.io, it was simply shared with you.