In the first half of the year, it’s been all about duration.
The first half of 2014 has been an interesting period for the fixed-income market. The widely forecast “bond market Armageddon” didn’t happen. Instead, a lackluster U.S. economic recovery, a rather tame inflation outlook, a very accommodative European Central Bank and geopolitical unrests helped drive down Treasury yields and lift prices.
The benchmark U.S. 10-year yield retreated to about 0.50 percent below where it started the year. The drop in yields boosted the performance of long-duration bond ETFs the most.
Here are the top five best-performing fixed-income ETFs of the first half of 2014.
5. iShares 20+ Year Treasury Bond ETF (TLT | A-80)
Total return: +12.85 percent; Effective duration: 18.11 years
TLT invests in Treasury bonds with at least 20 years remaining in maturity. Since Treasurys are perceived to be risk free, it is a pure duration play.
TLT benefited both from ongoing geopolitical unrest centered on Ukraine and Iraq, as well as from muted inflation forecasts. Believing inflation would not be a significant source of head winds, investors rushed to safe-haven Treasury funds like TLT to lock in yield when Ukraine descended into seemingly unending chaos.