What's Next For U.S. Treasuries

Includes: IEF, IEI, TLH, TLT
by: Eric Parnell, CFA

U.S. Treasuries received another strong boost on Wednesday. After what has already been a strong year in 2011, the Fed’s announcement that they would be increasing the duration of their Treasury holdings in a move known as “Operation Twist” sent longer term U.S. Treasuries soaring. I have been bullish on Long-Term Treasuries to this point. But after these robust gains, the question now becomes how much further upside, if any, can be expected from here?

U.S. Treasuries continue to extend their robust year to date gains. And they exploded to the upside on Wednesday as measured by the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT), advancing by +3.3%. Gains were supported by the Fed’s announcement that they would shift the duration of its existing Treasury holdings toward issuance with 6 years to 30 years remaining until maturity. The upside was particularly pronounced on the long end of the curve given the fact that many analysts had anticipated that the duration shift would not extend much past 10 years remaining until maturity.

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Despite this strong advance, the potential exists for further moves to the upside from here. The strong advance in Long-Term Treasuries sent 30-year Treasury yields from 3.21% to 3.04% by the end of the day. While this is a massive move lower in yield (and higher in price) in recent days, 30-Year Treasury yields are still well above previous low levels achieved back in December 2008. This stands in stark contrast to the rest of the Treasury yield curve, which has already been well below 2008 yields for some time now. Given the strong investor demand for high quality yield coupled with the Fed’s now explicit program to lower Treasury yields across the curve, it’s likely only a matter of time before Long-Term Treasury yields move lower to levels consistent with the rest of the yield curve. This implies still strong capital gains potential for Long-Term Treasuries including the TLT.

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A variety of other factors are likely to provide further support to Long-Term Treasuries. These include the potential for further global economic weakening and safe haven demand given the persistent threat of crisis from the eurozone.

So while the TLT has enjoyed recently strong gains, and a period of consolidation would certainly not be out of the question, it still holds the potential for further upside going forward.

Disclosure: I am long TLT.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

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