Head Spinning Reversal In Bond ETFs

June 27, 2019

What a difference six months can make. That’s how long it took for the Federal Reserve to go from hiking rates (with talk of more hikes to come) to suggesting it may cut rates imminently.

The turnaround in the 10-year Treasury yield wasn’t any less abrupt. It went from a yield of 3.25% in November to as low as 1.97% this month, propelling the iShares 7-10 Year Treasury Bond ETF (IEF) to its highest level since 2016. (Bond prices rise as yields go down.)

It’s enough to make anyone’s head spin.


U.S. 10-Year Treasury Yield


“It’s been quite an abrupt turnaround. I don’t remember seeing the outlook for monetary policy ever being so volatile,” remarked Brian Jacobsen, senior investment strategist for Wells Fargo Asset Management’s multi-asset client solutions group.

Jacobsen says that the wild ride in the 10-year yield is a direct result of the changing stance of monetary policy, one in which the Fed went from being patient with rate hikes to being prepared to cut rates, all in the span of two quarters.

Rising Recession Fears

Of course, the Fed hasn’t changed its stance in a vacuum. As the stimulus from the Tax Cuts and Jobs Act of 2017 wears off and the U.S.-China trade war acts as a drag, the economy is naturally slowing down.

Professional forecasters expect U.S. economic growth to be closer to 2% this year, down from close to 3% last year. That alone would be enough to send yields lower, but the uncertainty of how the trade war will play out and slowing growth around the world has the “R-word” (recession) popping up a lot more in conversations.

The chance of a recession over the next 12 months is 30%, according to a survey of economists by Bloomberg. Even if they are right, that still leaves a 70% chance of no recession, but the mere hint of the first economic contraction in a decade is understandably spurring safe-haven buying in Treasuries and other investment-grade bonds.

The iShares 20+ Year Treasury Bond ETF (TLT), the iShares Core U.S. Aggregate Bond ETF (AGG), the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) the iShares MBS ETF (MBB) and the Vanguard Total International Bond ETF (BNDX) have all been popular with investors seeking the safety of fixed income this year.

Most Popular Fixed Income ETFs Of 2019
Ticker Fund YTD Flows ($M)
VCIT Vanguard Intermediate-Term Corporate Bond ETF 5,202
TLT iShares 20+ Year Treasury Bond ETF 4,825
BNDX Vanguard Total International Bond ETF  4,482
MBB iShares MBS ETF 4,179
AGG iShares Core U.S. Aggregate Bond ETF 4,160

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