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IEF: Why 7-10yr Treasury ETF Is A Compelling Buy During Fed Rate Cut Cycle


  • The Federal Reserve stunned the world with an emergency rate cut of 50bps, the biggest single cut since late 2008.
  • The yield curve looks set to bull steepen with the Fed most likely cutting further in the near future.
  • While gains are expected in Treasuries ETFs across the board, we anticipate iShares 7-10yr Treasury ETF (IEF) to outperform on a risk-adjusted basis.

Fed Chair Jerome Powell followed through on his pledge last week to act as appropriate with a "shock-and-awe" emergency rate cut of 50bps, which was the largest since the Great Financial Crisis. As Bloomberg pointed out:

The surprise wasn’t necessarily the magnitude of the move. Rather, the shock is just how decisively the Fed chose to respond after signaling little urgency just a few days ago.

Indeed, the Fed's decision to take action now instead of the regularly scheduled FOMC meeting underscores their determination to prevent the recent stock market correction to spillover into a financial contagion. It can also be a prelude to the beginning of a new rate cut cycle. if we recall then-Fed Chair Ben Bernanke likewise surprised the world in August 2007 with a sudden discount rate cut of 50bps:

The Federal Reserve, reacting to concerns about the subprime lending crisis that's rocked financial markets in recent weeks, Friday cut its so-called discount rate half a percentage point, to 5.75 percent. -- August 17 2007 Source: CNN

Yield Curve Is About to Bull Steepen

What strikes resemblance between now and then is the fact that the yield curve had also just re-inverted based on the 10yr-1mo Treasury yield spread prior to the Fed's preemptive move:

Source: U.S. Department of The Treasury , WingCapital Investments

That proved to be the beginning of Fed's easing cycle, starting with September 2007's 50bp cut, which would not end until late 2008 at the peak of the Great Financial Crisis. In terms of the implications on the Treasury bond market, we observe how the shape of the yield curve evolved during the course of the cycle:

Source: U.S. Department of The Treasury, WingCapital Investments

In short, the yield curve shift can be summed up in the following 3 stages:

  1. It was

This article was written by

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Comments (2)

Too late a recommendation. It was obvious two months ago that (a) rates were already going down, and (b) the Fed was going to cut rates this year.
WingCapital Investments profile picture
If we recommended buying German 10-year bonds 5 years ago , we probably would be deemed as late. Or similarly when AAPL was at 100. The investment landscape is always changing so we would rather look forward than dwell on missed opportunities or hindsight.
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