The long-lasting rally in U.S. Treasurys has been a gravy train
for investors lucky enough to have hopped on board as the global
economy careened from crisis to crisis since the market collapsed
in 2008. But the events of the past week suggest that train may be
slowing if not coming to a screeching halt.
The iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca:TLT),
one of the market's largest fixed-income ETF that invests in the
long-dated end of the Treasury's yield curve-95 percent of the
fund's portfolio consists of 25-year Treasurys-has seen its price
drop almost 4 percent in the past week.
More to point, the fund shed more than 12 percent of its assets
in the last two days of last week. Month-to-date inflows, which had
been at more than $500 million in the middle of last week, fell to
just $33 million by Friday, according to IndexUniverse's "Flows
Tool." This month, including price movement, TLT's assets have
declined almost 4 percent to $2.88 billion.
That same fund was a poster child of performance last year,
returning 27.4 percent when eight out of the top 10 best-performing
ETFs in the U.S. market were U.S. Treasury funds. The Pimco 25 Year
Zero Coupon U.S. Treasury ETF (NYSEArca:ZROZ), for instance, was
another leading gainer last year, returning a whopping 51.9 percent
in 2011. That performance last year came despite a historic
downgrade of U.S. debt last August.
But now, TLT, like other such ETFs in the space, seems to be
adjusting to what could be more sustained growth. If that's true,
bond prices are likely to correct downward as yields rise. As it
stands, yields on benchmark 10-year Treasury notes rose in the past
week, to just over 2.25 percent, from about 2 percent.
The Writing On The Wall
A number of data series are pointing to stronger growth. For
starters, the latest round of job market data showed that
unemployment claims in the U.S. have fallen below levels many
economists regard as key benchmarks, suggesting the labor market is
First-time jobless claims fell below 400,000 in February,
hitting a four-year low. Employers also added a
better-than-expected 227,000 jobs in February, putting the U.S.
unemployment rate at 8.3 percent, according to U.S. Bureau of Labor
Statistics data. The data are still a far cry from, say, the 1990s,
but they are beginning to point to sustained recovery in the job
Perhaps even more telling is the Federal Reserve's positive
comments about the economy last week and its reticence about
committing to any more quantitative easing in the third quarter.
Without the Fed committing to keeping long-dated yields low through
its bond-buying program, yields began to adjust upward.
While the Fed's cautious optimism sent the Dow Jones industrial
average to test highs not seen since 2007 last week, it spurred an
exodus from the Treasurys market. U.S. Treasurys last week saw
their weakest price action since last summer.
Other Bond ETF Action
The ProShares Ultra 20+ Year Treasury ETF (NYSEArca:UBT), which
serves up double-leveraged exposure to the same index underlying
TLT-meaning, it's a bullish play on long-dated bonds-has seen its
price, and its assets, drop nearly 10 percent since March 1, with
the bulk of those losses taking place in the last week alone.
By contrast, its bearish counterpart, the ProShares Ultrashort
20+ Year Treasury fund (NYSEArca:TBT), which offers double inverse
exposure to the performance of that same long-bond index, has
gained more than 8 percent in the past five days.
Even disregarding all the complexities of the daily rebalancing
involved with leveraged and inverse plays, the price movement in
TBT relative to UBT signals that the widespread fondness investors
have shown for long-dated Treasurys since the market crashed in
2008 began evaporating last week in a steady way that minimized the
way such leveraged funds can deviate from their indexes.
TBT, the biggest inverse fund in the world, has had more than
$94 million in inflows in March, but its spiking prices and inflows
have lifted total assets so far this month by $500 million, or more
than 12 percent, according to data compiled by IndexUniverse.
Tellingly, TLT's assets, as mentioned earlier, have fallen this
month, essentially obliterating the inflows during the same time
Additionally, there are signs that some investors are shifting
Treasurys exposure to shorter-dated paper-a move that would protect
principal should bond yields continue to rise.
For example, on March 15, TLT suffered redemptions of more than
$411 million in a single session.
That same day, the iShares Barclays U.S. Treasury Bond Fund
(NYSEArca:GOVT) pulled in $284 million, a huge jump for a fund that
started the session with just under $5 million in assets.
GOVT has an average maturity of just over seven years, and while
it doesn't yield as much as TLT, its price is much less sensitive
to price changes than an ETF like TLT with an average maturity of
almost 28 years.
An official at iShares confirmed the massive creations on GOVT
on March 15, and noted that the company has seen such shifts of
bond holdings along the yield curve in the past.
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