Is The Treasury Bond ETF Rally Over?
Zacks Investment Research | Sep 12, 2016 11:04PM ET
U.S. Treasury bonds have had a dream rally so far this year with long-dated bonds like PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund Brexit Fuels a Global Rally in Bond ETFs ).
Dream Run of U.S. Treasury to Lose Momentum?
The spell of low bond yields seems to be turning the corner lately as rate hike talks are back with a bang. The talks, which were put back following the lackluster U.S. job, manufacturing and service sector data for the month of August, flared up lately on hawkish comments by a Fed official (read: Best Sector ETFs for a Rising Rate Scenario ).
Investors should note that the Fed Bank of Rosengren , “"if we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate.” He also noted that “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.”
All these comments stirred rate hike talks strongly on September 9. This in turn caused a carnage in the bond market with “30-year Treasuries recording their biggest two-day selloff in more than a year.”
Though Fed Governor Prepare for Rising Rates with These Inverse & Hedged Bond ETFs ).
Bond Yields Spike Globally
Apart from the Fed, global central banks also played their role in the sudden reversal in the U.S. Treasury market. First, on September 8, the ECB refrained from giving any more stimulus and in July, Bank of Japan also did not broaden the economy’s super easy money policies against many market watchers’ expectations (read: Dull ECB Meeting No Problem for These Europe ETFs ).
Speculation that BoJ could lower the buying of long-dated Japanese government bonds also had a negative impact. Bond investors figured out that there is a limitation on the central banks’ easing. U.S. Treasury 10-year yields jumped to 1.68% on September 12 since it hit record lows post Brexit while German 10-year bund yields entered the positive territory for the first time since July.
As per an article published in Wall Street Journal , the 10-year Japanese government bond yield is going up toward zero, though yields of these bonds were in the negative region in most part of this year.
Are U.S. Treasuries Overvalued?
After such a steep rally, overvaluation concerns are warranted. a 35-year party is over for bond bulls.”
Bottom Line
So, investors may take a cautious approach while playing U.S. Treasury ETFs in the coming days. Even if the odds of a September hike are low, the Fed might agree to a 25-bps hike by the year end and then high-flying U.S. Treasury ETFs may see a slump.
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