Bond ETFs Surge As Treasury Yields Hit Record Lows

It finally happened. After nearly three years, U.S. government bonds yields today hit new all-time lows, joining other developed-market bond yields, which had been falling for months.

The benchmark U.S. 10-year yield briefly fell to 1.3784%, below the previous low of 1.379% from July 2012.

US 10-Year Bond Yield

Meanwhile, the U.S. 30-year yield fell to a record-low 2.19%, undercutting its previous low of 2.22% from January 2015.

US 30-Year Bond Yield

Downtrend Not New

The latest push lower in bond yields can be attributed to the surprise “Brexit” decision in the U.K. last week. The event fueled a flight to safety into government bonds across the developed world.

But while Brexit may have been the latest spark, the downtrend in yields had long been in motion amid economic growth concerns and massive bond-buying programs by the European Central Bank and the Bank of Japan.

Those factors have been steadily pushing yields to levels once thought unimaginable.

The German 10-year bond yield, which first fell into negative territory last month, currently hovers at an astonishingly low negative 0.13%. Not to be outdone, the Swiss 10-year bond yield is at an eye-popping negative 0.58%.

Elsewhere, in Japan, the 10-year bond yield is at a record-low of negative 0.25%.

10-Year Bond Yields For Germany (Blue), Switzerland (Yellow), Japan (Green)

No Fed Rates Hikes On The Horizon

Up until recently, U.S. yields were holding up better than their counterparts elsewhere in the world due to the threat of Fed interest-rate hikes. But following a disappointing jobs report last month and now Brexit, traders don't see the Federal Reserve raising interest rates anytime soon.

In fact, Fed fund futures suggest the central bank won't hike rates until 2018 at the earliest, giving bulls free reign to buy up U.S. bonds and push yields lower (bond prices and yields move inversely).

Even Lower?

Some analysts still see value in the U.S. bond market and are calling for even lower lows in U.S. yields.

" ... if you’re facing negative interest rates on over 30% of government debt, you’re going to go look for where you can get positive rates,” Mohamed El-Erian, chief economic advisor at Allianz SE, told Bloomberg. "[The 10-year yield] can go to 1.25% quite easily if we continue to see this combination of more central bank activism and a slowdown in Europe.”

Others see the 10-year yield potentially falling below 1%, especially if Brexit pushes global economic growth down notably.

If that's the case, Treasury bond exchange-traded funds in the U.S. may continue to rally, adding to their hefty year-to-date gains. The iShares 7-10 Year Treasury Bond ETF (IEF | A-55), with a weighted-average maturity of 8.5 years, is up 8% on the year following today's gains.

Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT | A-83) is up 17.4% in the period thanks to its longer weighted-average maturity of 26.8 years.

TLT Price Chart

Finally, the Treasury-heavy iShares Core U.S. Aggregate Bond ETF (AGG | A-98) is up 5.5% on the year. AGG is the second-most-popular ETF this year, with inflows of $6.8 billion, according to FactSet data.

YTD Gains For IEF, TLT, AGG

Contact Sumit Roy at [email protected].