What to Do if Treasury Bond ETFs Peter Out

As more and more economic reports signal a recovery process, however tentative, investors are gradually regaining their risk appetites. If the trend continues, it could put treasury bond ETFs on the losing end of things.

Last year, investors turned to Treasuries as a last ditch wealth-preservation effort. Today, Treasuries have been made less appealing as prices fall and the government runs up a deficit, according to Financial Planning. Tax rolls are also down at the state and city level, which doesn’t make the outlook for municipal bonds that much better.

But investors have alternatives that can give diversification and varying yields:

• Intermediate bond funds that include a mix of government, mortgage and investment-grade corporate bonds
• Treasury inflation-protected securities (TIPs)
• Non-government investments, such as corporate bonds

Treasury bond prices may continue to fall for the time being. The government is issuing more debt, the economy is stabilizing and the Federal Research is purchasing more Treasuries, a recipe for declining bond prices, says John Parry for Reuters. This has put the central bank in a quandary: lower demand for safe havens means higher yields, which threatens to keep a lid on consumer borrowing, further hampering economic growth.

• PowerShares Insured National Muni Bond (PZA): up 9.3% year-to-date; yields of 4.9%

• iShares Lehman 7-10 Yr Treasury Bond Fund (IEF): down 7.7% year-to-date; yields 3.9%

• iShares Lehman TIPS Bond Fund (TIP): up 3.2% year-to-date; yields 4.4%

• iShares iBoxx $ Invest Grade Corp Bond (LQD): up 4.5% year-to-date; yields 5.6%

For full disclosure, Tom Lydon’s clients own shares of LQD and TIP.

Max Chen contributed to this article.

Comments

[Dotcom:]

Good article.

Aug 10 01:34 PM

[DHal:]

Are there any variable rate ETF's to use when we reach a rising interest rate environment??

Aug 10 02:51 PM

[Tom Lydon:]

Below is a link to a story about a few Variable Rate Municipal Bond ETFs.
www.etftrends.com/2009...

Aug 11 03:37 PM