As U.S. stocks continue to reflect pervasive uneasiness about the prospects for a robust recovery, investors are flocking towards low-risk securities with impressive pace. Recent weeks have seen investors shed their appetite for risk, fleeing equity markets and piling into the relative safety of U.S. Treasury bonds. That has pushed many key rates to record lows, causing investors to take a closer look at bond markets.
Despite record debt on Washington’s balance sheet and growing concern over the ability to make good on those obligations, investors have bought the Treasury bills with a fervor unmatched in recent times. After hitting their 52 week high with a yield of 4.01% in early April, 10-year bonds have watched their prices soar and yields tumble all the way down to below 3%; a decline in the yield of more than 25%. Meanwhile, two year bonds are yielding below 0.6%, right around the all-time low of 0.56%. Things are no better in the long-term side of the market as 30 year bonds have fallen below 4% on continuing fears over deflation and anemic growth.
These developments have put several government bond ETFs in focus, especially those targeting longer-term maturities. Bonds with more time to maturity tend to be the most volatile fixed income securities, since investors in these instruments are stuck with the corresponding coupon rate for a longer period of time. Below, we profile several bond ETFs that have posted big gains in 2010–many have climbed more than equity markets have sunk–as investors have embraced lower-risk assets.
Long U.S. Treasury Funds
iShares Barclays 20 Year Treasury Bond Fund (TLT): Traditional long-term bond exposure can be achieved with TLT, an iShares ETF linked to the Barclays Capital U.S. 20+ Year Treasury Bond Index. This fund is one of the most popular ways to establish long term fixed income exposure; average volume is just over 6 million shares a day and it has $2.6 billion in assets under management. This fund has performed very well in 2010 posting a gain of more than 12% to date.
Vanguard Extended Duration Treasury ETF (EDV): This ETF puts a unique twist on fixes income exposure, offering exposure to long-term Treasury STRIPS. These securities are created when a single coupon or principal payment has been ’stripped’ out of a bond. This fund is up close to 20% so far in 2010, an eye-popping return for an asset class that is traditionally known for low volatility and stable returns. EDV is also an interesting option for cost-conscious investors, as the expense ratio is just 0.14%.
PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ): This passively-indexed PIMCO bond fund offers investors a chance to invest in long-term zero-coupon bonds. These bonds don’t pay any interest, trading at a discount to face value and thereby offering return potential as the maturity nears. Since the maturities of ZROZ’s underlying holdings are generally far off in the future, this fund is a popular option for investors seeking safe havens from potential equity market turmoil. The fund has soared by almost 20% during 2010, making it one of the best performers in the Government Bonds ETFdb Category.
Short Treasury ETFs
After the slide in yields and run up in prices, many investors (including myself) are beginning to wonder if the inevitable (although perhaps distant) rate hike will create an opportunity to profit from short exposure to long-term bonds. Although deflation remains more of a concern in the short-term, CPI will eventually head higher and force Bernanke and company to raise rates. For investors looking to short long-term bonds, there are a couple interesting ETF options:
ProShares UltraShort Barclays 20+ Year Treasury (TBT): This fund seeks to deliver daily returns equal to -200% of the Barclays Capital U.S. 20+ Year Treasury Index, a benchmark that measures the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years. Interest in short exposure to bonds is evidenced by TBT’s incredible popularity; this fund currently has about $4.5 billion in assets.
Direxion Daily 30-Year Treasury Bear 3x Shares (TMV): For investors with the risk tolerance for a 3x leveraged play on U.S. government bonds, TMV may offer an interesting choice. The fund is linked to the NYSE Current 30 Year U.S. Treasury Index, a one-security benchmark comprised of the most recently issued 30-year Treasury Bond. That bond must be U.S. dollar-denominated with a fixed rate, non-zero coupon that is non-callable with a maturity of 30 years at issuance.
Disclosure: No positions at time of writing.
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