Bond ETFs Are Partying Like It’s 2009

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Includes: AGG, EDV, G, IEF, IEI, SHY, TIP, TLT
by: Gary Gordon

If you watch enough CNBC, or if you read enough Investors Business Daily articles, you’re bound to come across the word, “overshooting.” Typically, this phenomenon is used to describe stocks surging dramatically higher when the economic backdrop may be favorable. Or, more recently, stocks plummet to unbelievable depths when the economic environment is uncertain.

Stock markets can ”overshoot” reasonable levels due to greed or overshoot (undershoot?) to the downside on irrational pessimism. Yet you rarely here the same discussion about the bond market.

Case in point… in March of 2009, the U.S. economy had virtually fallen off a cliff. Millions of jobs had been eradicated, the financial system had been teetering on the brink of collapse, a “Super Majority” became a political reality in the Senate and the term ”Great Depression II” had been ushered into our daily lives. At that time, 10-year bond yields reached a preposterously low 2.87%.

Here in July 2010, companies are adding employees (albeit at a slow pace), the financial system is more stable (though questions remain) and the political winds are shifting back towards a split Congress (yet hardly a guarantee). Still, after Bernanke’s testimony on an “unusually uncertain” economy, 10-year bond yields fell to 2.87%.

Note: I do not advocate buy-n-hold… ever! That said, I find it extremely difficult to fathom the 10-year treasury serving me better than shares of Intel (NASDAQ:INTC) over the next decade; the latter has a 2.95% yield and is certainly likely to raise dividends/rise in price.

In brief, in March 2009, there were genuine concerns about the viability of banking and credit as we had known it. Today, I believe treasury bond price gains have seriously “overshot.” They are pricing in a deflationary depression rather than low inflation/modest growth/mild recession/economic stagnation.

Understanding this, it seems very silly to go near Treasury Bond ETFs. The likelihood that yields will continue to fall seems negligible, although they may be relatively range-bound until the mid-term elections. After that, it is hard to envision any scenario other than falling bond prices and rising yields.

Year-To-Date Treasury Bond ETF Returns (Through 7/21/2010)
Approx %
Vanguard Extended Duration Treasury (NYSEARCA:EDV) 22.8%
iShares 20+ Year Treasury Bond (NYSEARCA:TLT) 15.8%
iShares 7-10 Year Treasury Bond (NYSEARCA:IEF) 10.6%
iShares 3-7 Year Treasury Bond (NYSEARCA:IEI) 6.6%
iShares Aggregate Bond (NYSEARCA:AGG) 6.3%
iShares TIPS Bond (NYSEARCA:TIP) 3.6%
iShares 1-3 Year Treasury Bond (NYSEARCA:SHY) 2.0%
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Disclosure Statement: 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 receives advertising compensation at the ETF Expert web site from Invesco PowerShares Capital Management, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.