Government Bonds Outperforming Amidst Chaos in U.S.

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Lately, the challenges in Europe have seemed to make the U.S. Government long-term bonds attractive to investors, possibly due to their perceived safety. So much so, that June's long-term government bond ETFs have done very well, completely disregarding the 2011 S&P downgrade of the U.S. debt.

Reverse Pageant?

This situation is similar to what has happened with the U.S. Dollar - maybe it is a "reverse pageant syndrome" where the audience is rooting for the least ugly rather than the most beautiful.

Lately China is having its own problems with growth and credibility, the Middle East has been having bigger problems with the Arab Spring, Japan is crawling out of the hole dug by its disasters, Europe is striving to keep the eurozone alive, and finally the emerging markets' growth is slumping worldwide; the U.S., in spite of its own GDP issues and fiscal cliffs, seems to be a better place to invest in, relatively.

4 Best Performers in U.S. Government Bonds

These four Long Government ETFs have performed excellently in the month of June and have clearly outperformed all major indices' June returns.



ZROZ PIMCO 25+ Yr Zero Cpn U.S. Trsy Idx ETF 20.10%
EDV Vanguard Extended Dur Trs Idx ETF 19.00%
TLT iShares Barclays 20+ Year Treasury Bond 12.40%
TLO SPDR Barclays Capital Long Term Treasury 11.10%

Note: Not just these, but other long-term bond ETFs such as GLJ (iShares 10+ Year Government/Credit Bond) and BLV (Vanguard Long-Term Bond Index ETF) have done reasonably well as well, with 8.90% and 8.10% gains.

Any correlation with market movements?

Take a look at TLT's performance vs. the S&P 500, Nasdaq and DOW indices below.

TLT's trend has been in the opposite direction from the indices. It appears that investors have been using these ETFs as a safety net. This kind of explains why in the past year, we have seen lesser and lesser equity allocation by analysts, causing the Sell-Side Indicator to show extreme bearishness - to the point that it makes a best bullish case in 15 years.

These government bonds could continue to remain a safe bet for investors so they don't have to switch to cash, if and when the recent rally fizzles and the market corrects itself further.

This trade appears to be a good Risk-Off play, and is at least better than switching to cash. Piling up cash is not the best way of tricking the bear, unless you know something that we all don't know about the equity and bond markets in particular and overall economy in general.


  • Bond funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
  • Bonds and hence Bond Funds decrease in value as interest rates rise. The Fed has promised that interest rates will not rise until 2014, which makes government bond funds a safer bet.
  • There is an inflation risk, if the principal repaid at maturity has less purchasing power, especially when the inflation rate is trending up.
  • Putting too much money in these bonds is a good way to avoid bull markets for stocks, too. For example, during the 1990's bull market, bonds returned much lesser than equity funds.

In fact, history shows that in 1994, long-term Treasury bond funds plunged 7%, and again in 1999 and 2009 (especially during the dead cat bounce), long-term Treasuries lost 9% and 12%, respectively.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.