Why Keeping an Eye on Treasury ETFs Is Important

When it comes to investing in stocks, bonds and exchange traded funds (ETFs), all investors should watch the Treasuries market and for good reason.

Stocks and bonds are two completely different areas of the market. One (stocks) gives investors exposure to risk while the other (bonds) is relatively safe. Why should investors who want absolutely nothing to do with the bond market keep an eye on Treasuries? Matt Krantz of USA Today states that Treasury prices are so important because they put a floor under investment expectations because of their safety characteristics.

Watching the yields on Treasuries gives investors an indication of how other investors are feeling about the overall markets. If investors are flocking to Treasuries, which drives yields down, it’s a signal of fear in the markets.

Treasury yields also enable investors to identify a required rate of return. For example, if the yield on a Treasury, a relatively risk-free investment, is 3.5%, then one would need to require a return on investment greater than this to take on any risk.

Among the many Treasury ETFs investors can look at are the following:

• iShares Lehman 7-10 Yr Treasury Bond Fund (IEF)
• Vanguard Extended Duration Treasury ETF (EDV)

Kevin Grewal contributed to this article

Comments

[squark62:]

liquidity is important when buying ETFs. though i agree with the premise of this article, EDV lacks the liquidity of IEF for example. lack of liquidity widens bid/ask spreads and transaction efficiency at the least.

Average Bid Ask Ratio: 0.06% for IEF according SA
Average Bid Ask Ratio: 0.96% for EDV according SA

Sep 29 11:48 AM

[Living4Divi...:]

"Treasury prices are so important because they put a floor under investment expectations because of their safety characteristics"

Safety characteristics?
In nearly all academic studies, risk is defined as "risk equals volatility." Usually the safest asset is deemed to be the US T-Bill, often called by the academics the "risk free asset." This is misleading because it is merely an academic reframing of the definition of real risk.

If inflation shoots up 10%, that T-Bill now buys 10% less goods. If the dollar loses 20% against the value of a basket of currencies, that dollar buys 20% less imported oil, 20% less imported food and 20% less clothes made in china.

Real risk equals loss of purchasing power.

Sep 29 03:53 PM

[Fruffing:]

Liquidity in the EDV is an issue, but there's not a lot of merit in comparing a 7-10 yr index (IEF) with a product designed to mimic the 25 yr zero (EDV).
Far different kettles of fish. Thin story, but timely.

On Sep 29 11:48 AM squark62 wrote:

> liquidity is important when buying ETFs. though i agree with the
> premise of this article, EDV lacks the liquidity of IEF for example.
> lack of liquidity widens bid/ask spreads and transaction efficiency
> at the least.
>
> Average Bid Ask Ratio: 0.06% for IEF according SA
> Average Bid Ask Ratio: 0.96% for EDV according SA

Oct 02 09:59 AM