The recent advance in exchange traded funds indexed to long-term U.S. Treasury bonds is a bad sign for equity investors looking for a Santa Claus rally to end 2011.
The $3.4 billion iShares Barclays 20+ Year Treasury Bond Fund (TLT) gained nearly 5% last week. Yields on the 30-year Treasury bond have dropped below 2.9%. Bond yields and prices move in opposite directions.
The bond ETF’s chart “reflects the ongoing flight to safety,” said Tarquin Coe, technical analyst at Investors Intelligence.
“Trading for the past three months has interestingly consolidated at the highs from the end of 2008. That prior period saw a sharp reversal from current levels,” he wrote in a newsletter Monday. “The present consolidation is taking the form of a triangle, a pattern that is typically a continuation move. Should that prove to be the case then the defensive rotation would extend into the New Year.”
Investors worried about the eurozone debt crisis and deflation are moving into U.S. Treasuries even though they offer paltry yields.
“A heavy Treasury auction schedule with a big settlement on Thursday was enough to contribute to keeping stock prices in check last week, but not enough to knock down Treasuries,” wrote Lee Adler at Minyanville. “Demand for U.S. government paper is so great it simply engulfs even heavier-than-expected levels of new supply. The massive capital flight out of Europe is now confined to the only game in town, the U.S. Treasury market.”
The dollar and Treasury bonds have rallied despite Standard & Poor’s stripping the U.S. of its triple-A credit rating, Bloomberg reported Monday. Four months after the move, government bonds have returned 4.4% and the dollar has gained 8.6% relative to a basket of currencies, according to the report.
Two ETFs tracking “STRIPS,” zero coupon bonds issued by the U.S. Treasury, were the top performers last week among unleveraged funds, rallying more than 7% - PIMCO 25+ Year Zero Coupon U.S. Treasury (ZROZ) and Vanguard Extended Duration Treasury (EDV).
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