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Bond Bashing: Why Income ETFs Aren’t Handling The “Truth”

05 April 2010 at 4:02 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

If you want to get stocks rolling, all you need is “spin.” Home sales¬†surged 8%. The service sector expanded at the fastest pace in 4 years. Unemployment remained level for the 3rd month in a row.

Without the spin, however, mortgage rates are climbing faster than incomes. The service sector expansion is more indicative of¬†service price inflation, as “Service Employment” actually worsened in the ISM Report.¬†And¬†U-6 employment data, representing¬†part-timers as well as those that have stopped looking,¬†registered 17.5% underemployed/unemployed.

Yikes! Can stocks really maintain their upward bias?

Of course, stock markets do not reflect what is; they reflect expectations about what will be in the future. And the current expectations are that things are going to be a whole heck of a lot better.

There’s just one nagging element to the broad-based stock rally. Specifically, how much further will bond prices fall before the higher yields on Income ETFs become a little too attractive to ignore?

For example, Monday’s bond bashing pushed the 10-year note to 3.99%. So how far north of 4% can the 10-year’s yield travel¬†before¬†investors downshift? 4.10% 4.25%? 4.5%?

The ugly truth about bond ETFs over the last 10 trading sessions:

10-Day (Trading Day) Return For Popular Bond ETFs (3/19/10-4/5/10)
iShares 20+ Year Treasury Bond (TLT)     -3.70%
iShares 7-10 Year treasury Bond (IEF)     -2.04%
iShares Investment Grade Bond (LQD)     -1.46%
iShares TIPS Bond (TIP)        -1.18%
Vanguard Total Bond (BND)       -0.96%
iShares Intermediate Corporate Credit (CIU)     -0.85%
iShares High Yield (HYG)       -0.47%


The data is pretty crisp in its presentation; that is, you have to go further and further out on the risk scale to lose less money from Income ETFs. The longer the U.S treasury, the more money you have lost on your investment in a very brief period of time.

(Note: Review the¬†3/16/2010 feature,¬†China’s Trimming Its U.S. Treasury Exposure… And So Am¬†I!¬†While I would not call it “prescient,”¬†it may be called, “timely.”)

Corporate bonds are a bit better than treasuries, but only high-yield corporate bonds came close to maintaining principal. Actually, SPDR Capital Convertible Bonds (CWB) also picked up a bit of ground. And, rising bond yields have yet to adversely affect JP Morgan Alerian MLP (AMJ), largely due to rising demand for oil and gas.


You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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