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Long Treasury Bond ETFs Are Not On The Fed’s “Buy” List

13 October 2010 at 10:56 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

The 30-year U.S. treasury bond yield is at a paltry 3.86%. And yet, many risk-averse investors think this may be the safest haven for their money.

Never-mind the¬†fact that the yield¬†started the year closer to 4.66%. Forget the reality that the Fed’s not buying long-term treasuries in its upcoming quantitative easing¬†(QE).¬†All that some folks¬†see are the dazzling 17% YTD gains for proxies like the¬†iShares 20+ Long-Term Treasury Bond¬†Fund (TLT); unfortunately,¬†these are the folks that¬†will be misled by bond euphoria.

Here are some of the problems with long-term Treasury Bond ETFs today:

1. Record Yield Spreads Between 10-Year Intermediate Yields and 30-Year Long-Term Yields. The current 10-year treasury yield approximates 2.47%. And according to Bloomberg… the 1.39% points more for the 30-year represent a record spread between the two bond types. (Note: It is a record for as long as¬†Bloomberg has tracked the spread, or 1977.)

The market itself clearly doesn’t believe that¬†there’s sufficient demand for¬†long-term treasury bonds. The disconnect is likely attributable to the reality that the¬†Fed’s quantitative easing will involve¬†treasury bond purchases in the¬†5-10 year range. And in fact, many 15- and 30-year fixed mortgage rates are¬†tied to the 10-year note, whereas scores of consumer credit rates are tied to 5-year rates.

2.¬†Long-Term Treasuries Bottomed Out?¬†¬†If one takes a look at the 30-year yield on a chart, one’s immediately drawn to late August. As stocks and commodities and other risk assets took off in September, the 30-year yield continued to climb higher. In essence, the¬†smart money may be leaving long-term¬†government debt.¬†


30 Year Treas Yield

Yet by the same token, the intermediate term bond yields in the 5-10 year range have held their own. Why? It may be because the Fed will be purchasing those assets. It follows that the iShares 3-7 Year Treasury Bond (IEI) and iShares 7-10 year Treasury Bond (IEF) have maintained their respective prices, whereas iShares 20+ Long-Term Treasury Bond Fund (TLT) is trending lower.


3. Long-Term Bond ETFs Falling Rapidly In Relative Market Strength Percentile Rankings. With investors¬†snapping up riskier assets (e.g., stocks, commodities, emerging market currencies, etc.) on the U.S. dollar’s epic deterioration, one should expect a decrease in the relative strength rankings for all bond assets. Indeed, that has been the case.

Yet on careful examination, the most prominent fall-off has come from the longer-term bonds. For instance, 3 months ago, there were 8 Fixed Income ETFs in the 90th percentile or better for the entire ETF universe. Today, according to ETFscreen.com, the only bond funds to hang onto impressive relative strength are iShares JP Morgan Emerging Market Bond (EMB) and PowerShares Sovereign Emerging Market Debt (PCY).

Relative Strength Percentile Rankings For “Formerly Hot” Bond ETFs ¬†
          7/20 RS Rank 10/13 RS Rank
iShares 20+ Year Treasury Bond (TLT)   95.1   65.9
SPDR Long-Term Treasury (TLO)   94.4   67.2
iShares 10-20 Year Treasury (TLH)   93.4   69.8
Vanguard Long-Term Bond (BLV)   93.0   63.2
PowerShares 1-30 Laddered Treasury (PLW) 92.6   57.1
iShares 7-10 Year treasury Bond (IEF)   91.5   62.3
Vanguard Intermediate Term Bond (BIV)   90.7   57.8
iShares Investment Grade Bond (LQD)   90.0   56
PowerShares Emerging Market Sovereign Debt (PCY)  89.0   73.5
iShares JP Morgan Emerging Market Bond (EMB) 88.7   72.4


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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. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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