Short-term Treasury bond ETFs, which were popular among investors last year thanks to the taper talks and rising long-term yields, now appear to be losing steam. The U.S. economy gained considerable momentum in Q2 having expended at a rate of 4%.
Though the third quarter had a shaky start, recovering housing fundamentals, benign inflation numbers, improving job data, high stimulus expectation in Europe as well as truce talks between Russia and Ukraine pushed the key U.S. benchmark – the S&P 500 – to multi-year highs. In fact in late August, the S&P 500 crossed the major milestone of 2,000 for the first time in history.
All these have led to growing concerns over the hike in short-term interest rates sooner than expected. Recent strength in economic data had led to concerns that the Fed could start raising rates in March 2015 instead of the initial June or September 2015 timelines.
This in turn has lowered the appeal for short-term bond ETFs. As a result, yields are rising on the low-and-middle part of the yield curve rather than the long end. Yield on 2-year Treasury note jumped 17 bps from the level of 0.39% level seen on January 2, to 0.56% on September 9. In the same time frame, yield on 10-year Treasury note fell 50 bps to 2.50% from 3%.
Short-term bond ETFs like iShares 1-3 Year Treasury Bond ETF (ETF:SHY), Schwab Short-Term U.S. Treasury ETF (ETF:SCHO) and Vanguard Short-Term Government Bond ETF (NASDAQ: VGSH) have shed about 0.14% each over the last one month.
Though August job data was on the weaker side, pushing the rate tightening speculation down, the underlying tone of the economy is positive at the current level. Whatever be the case, sooner or later, short-term interest rates are expected to move up in 2015.
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