This Treasury Bond ETF Trade Is Hot Again

April 18, 2017

Buying long-dated U.S. Treasury ETFs was a pretty unpopular idea late last year. That tide now seems to be turning.

You could say a lot has changed in a few short months. Last fall, investors were faced with the end of the 30-year bond rally, and interest rates were expected to rise again putting pressure on the value of bonds. More importantly, a new U.S. administration was coming in, with the promise of pursuing domestic growth policies that would fuel a stock market rally. It was all about risk-on.

A fund like the iShares 20+ Year Treasury Bond ETF (TLT) bled more than $850 million to net redemptions in less than two months following November’s presidential election. As money was coming out of the fund, TLT was dropping—to the tune of some 8.3% in losses in that same period.

Here’s a look at the performance of TLT in the past year (relative to the S&P 500)—note the plunge following the U.S. presidential election in November. There was a huge divergence in direction:

Coming into 2017, speculators mounted a short position in U.S. Treasury futures that a hit a “historic high” in the first quarter of this year, according to DoubleLine’s latest quarterly report. By mid-March, 10-year Treasury yields closed at a high of 2.61%—its highest closing level since September 2014.

And now, a month later, yields on 10-year Treasuries are testing the 2.2% level, down more than 40 basis points from their March high (bond yields fall when prices rise). TLT has seen net creations of more than $700 million year-to-date, half of which has come in the last month alone as the fund rallied some 5.5%. Year-to-date, TLT now has gains of about 4.1%. 

Charts courtesy of StockCharts.com

 

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