The fixed income world, in particular the Treasuries, has been a 'Treasure Trove' for investors this year. This is especially true as Treasuries have returned 4.8% in the first half of 2016 based on Bank of America Corp.'s U.S. Treasury Index. With this, they are heading toward the best start in more than a decade (read: Don't Fear Market Woes: Profit from These ETFs ).
Behind the Surge
Global growth concerns, China-led deceleration fears, oil price volatility, geopolitical tensions and an uneven domestic economy have driven demand for safe-haven bonds since the start of the year. Both the World Bank and the International Monetary Fund (IMF) have slashed their global growth forecast for the second time for this year. The World Bank now expects global growth of 2.4% versus 2.9% expected earlier due to sluggish growth in advanced economies, stubbornly low commodity prices, weak trade and diminishing capital flows while the IMF lowered the projection to 3.2% from 3.4%.
Additionally, the Fed's cautious stance on policy tightening has given further boost to the bond market. In its latest meeting this week, the Fed signaled that the pace of rate increases will be slower than previously expected over the next two years, pushing yields down and bond prices up (read: Red-Hot Income ETFs Post Fed Meet ).
The latest boost to Treasuries came on rising concerns that the United Kingdom favor exiting the European Union in a June 23 referendum. The prospect of a "Brexit" has roiled the market globally, bolstering the appeal of U.S. government debt. Further, yields across the globe have dropped to unprecedented levels with German 10-year bond yields falling below zero for the first time, and Japan and Australia's yield reaching all-time lows.
Moreover, the behavior of the yield curve justifies the bullish trend in Treasuries. This is because the short end of the yield curve is rising faster than the long end and the spread between the 2-year and 10-year yields tightened to 88 bps , indicating the flattest yield curve since 2007. This trend will likely continue since a tight Fed policy is in the cards.
While the rally in Treasuries has been broad based with many ETFs hitting fresh highs, longer-dated bonds have been the real winners are leading the space higher. Below, we have profiled five ETFs that surged to new one-year highs in the recent trading session. All these have a strong Zacks ETF Rank of 2 or 'Buy' rating with a High risk outlook, suggesting their continued outperformance in the months ahead (see: all Government Bond ETFs here ).
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ
This ETF follows the BofA Merrill Lynch Long Treasury Principal STRIPS Index and holds 20 securities in its basket. Both effective maturity and effective duration of the fund are 43.56 years. This fund is often overlooked by investors as depicted by AUM of $218.7 million and average daily volume of 47,000 shares a day. It charges 16 bps in annual fees and returned 21.1% in the year-to-date timeframe. The product hits a 52-week high of $133.87 per share.
Vanguard Extended Duration Treasury ETF EDV
This fund provides exposure to the long-term Treasury STRIPS market by tracking the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. It holds 75 bonds in total with effective maturity of 25.1 years and average duration of 24.8 years. Expense ratio came in at 0.10%. The product has amassed $608.9 million in its asset base while sees moderate volume of 93,000 shares per day on average. It hit a record one-year high of $137.32 per share, representing a gain of about 20.7% in the year-to-date time frame.
iShares 20+ Year Treasury Bond ETF TLT
This is the most popular and liquid ETF in the long-dated bond space with AUM of over $8.1 billion and average daily volume of 8.4 million shares. It tracks the ICE U.S. Treasury 20+ Year Bond Index, holdings 32 securities in its basket. The fund has average maturity of 26.52 years and effective duration of 17.96 years. It charges 15 bps in fees per year and surged to a fresh one-year high of $137.56 per share, having gained 13.8% so far this year (read: Safe Haven ETFs Surge on Brexit Fears ).
Vanguard Long-Term Government Bond ETF VGLT
With AUM of $324.7 million, this fund follows the Barclays Capital U.S. Long Government Float Adjusted Index. It holds 71 bonds in its basket with average maturity of 24.9 years and average duration of 17.7 years. The ETF trades in good volumes of more than 111,000 shares and has 0.10% in expense ratio. The product hit a one-year high of $84.43 per share and has moved higher by about 13.4% this year.
SPDR Barclays Long Term Treasury ETF TLO
This fund tracks the performance of the Barclays Long U.S. Treasury Index, holding 47 bonds in its basket. Average maturity and modified duration come in at 25.23 years and 18.16 years, respectively. TLO has accumulated $445.1 million in its asset base while trading in volumes of 148,000 shares a day on average. It charges 10 bps in annual fees and has returned about 12.9% so far this year. The fund touched new one-year high of $79.18 per share.
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