The yield on the 10-year U.S. Treasury fell to an 11-month low
on Wednesday and the drop continued into Thursday -- as the yield
is on the verge of breaching the 2.40 percent level.
When the word that the Fed was going to taper began to spread
throughout the market, the consensus was that interest rates
would rise as the Fed no longer propped up bond prices. That has
not been the case.
After peaking the last day of 2013, yields on the 10-year have
been in a slow and steady decline. The latest fall, however, is
extremely important on a technical basis. With no clear support
for the yield on the 10-year, other than a little near the 2.30
percent area, bonds could continue to rally and push the yield
down to the 2.0 percent level.
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Bond prices move in the opposite direction of yields and
therefore, bond ETFs have been big winners this year. The iShares
20+ Year Treasury Bond ETF (NYSE:
) is up 13 percent in 2014 and currently trades with a dividend
yield of 3.2 percent. The iShares 7-10 Year Treasury Bond ETF
) is up just over five percent this year, and has a dividend
yield of 2.1 percent.
The longer dated bonds will be more volatile, and therefore
will have more dramatic gains/losses when yields are on the move
-- and this is the reason TLT has outperformed IEF in 2014.
The corporate bond ETFs have also been benefiting from the
fall in interest rates. The iShares iBoxx Investment Grade
Corporate Bond ETF (NYSE:
) is a basket of U.S.-based corporate bonds that are considered
investment grade. That ETF is up five percent this year, and pays
out a 3.1 percent dividend yield.
The riskier corporate junk bonds have not experienced as much
of a rally, but they do offer a higher dividend yield. The SPDR
Barclays High Yield Bond ETF (NYSE:
) is up 2.5 percent in 2014 with a dividend yield of 6.6
Yields will eventually start to move higher in the future, and
owners of bond ETFs must be aware of the risk. A rise in interest
rates could result in losses in bond ETFs. For now, investors can
ride the bond ETF wave, but should be aware it may eventually
© 2014 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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