T-Bond ETFs Stumbling Amid Fed Taper Talk

June 24, 2013

Longer-term Treasurys, it seems, may be quickly turning into a horrible investment.

Longer-dated Treasury ETFs have turned into a bad investment in the past month since the Federal Reserve first signaled that the era of extraordinarily loose monetary policy may soon begin to be wound down. Only news from China about problems in short-term credit markets has interrupted the selling.

Fed Chairman Ben Bernanke’s comments on May 22 that the central bank was seriously considering “tapering” its $85 billion a month “quantitative easing” bond buying program got the selling started. He reiterated the spirit of those comments on June 21 after a Fed policy committee, underscoring the central bank’s changing view on QE by highlighting that it sees U.S. growth solidifying in the coming months.

The only thing standing in the way of a bigger sell-off appears to be news from China that short-term credit markets may be seizing up there. Yields on 10-year Treasurys got as high as 2.63 percent in early trade Monday, but pulled back in to around 2.50 percent around midday as concerns about China started percolating through the market. Still, confidence is high in global markets that the government there will step in and provide liquidity if necessary, using its estimated $3 trillion in foreign reserves.

The China news helped lift the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) on Monday by almost a percentage point to $109.35 share, but the nearly $4 billion ETF has fallen in the past month by upward of 7 percent, and by 10 percent so far this year.

Apart from the safe-haven flows into U.S. debt in the wake of the Chinese news staving off more selling, one clear way to avoid what is turning into a rout is to short Treasury funds like TLT or by owning an inverse ETF that’s designed to rise when Treasurys are selling off.

The ProShares UltraShort 20+ Year Treasury ETF (NYSEArca: TBT), a double-exposure short ETF designed around the same index as TLT, fell today as Treasurys rallied, but the fund—the biggest leveraged and inverse ETF in the world—has risen more than 13 percent to $74.22 this month, and almost 17 percent this year.

It’s crucial to remember that while TBT’s gains are directionally consistent, the ETF isn’t designed for long-term holding. That’s because it rebalances daily, which means the fund’s price can deviate significantly from the returns of its underlying index.

The overall trend of the Treasurys market was even more clear in longer-dated funds than TLT, such as the Pimco 25+ Year Zero Coupon U.S. Treasury ETF (NYSEArca: ZROZ). That fund has fallen 14 percent—more than TLT’s 10 percent decline.

The iShares Barclays 10-20 Year Treasury Bond Fund (NYSEArca: TLH) was meanwhile down 5 percent in the past month and 6.75 percent so far this year.

YTD Retuns On Longer-Dated Treasurys

Treasury Chart

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