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5 Treasury ETFs Rally on Falling Inflation Expectation

Growing Washington turmoil and muted inflation are fueling rally in Treasury ETFs


Hopes of strong earnings and a dovish Fed triggered a rally in global stocks, while at the same time growing Washington turmoil and muted inflation took investors to safety. U.S. consumer price remained flat in June against the expectation of a 0.2% increase, signaling doubts over the third rate hike this year. This represents year-over year growth of 1.6%, the smallest gain since October 2016, after a rise of 1.9% in May.

Concerns over inflation expectation gave a fresh lease of life to the bond markets, especially long-term Treasuries. In fact, yields on 10-Year Treasury note fell nearly 9 bps to 2.23% while 2-Year Treasury yields tumbled two bps to 1.34% resulting in flattening of the yield curve. The spread between the yields of the 2-Year and 10-Year Treasury notes narrowed to 89 bps. The trend confirms the bullishness in long-term Treasuries.

Further, the last week’s failure of Republican efforts to pass health-care legislation has started to cast doubt on the government debt-ceiling impasse in October. This concern is also fueling a rally in Treasuries.

Given this, long-term Treasury ETFs have been on the rise over the past 10 days and will likely continue to do so at least for the near term. As such, we have highlighted some solid picks for investors betting on falling inflation expectation and Fed’s dovish view. Though most of these funds have an unfavorable Zacks ETF Rank of 4 (Sell) or 5 (Strong Sell), they look interesting especially for the near term.

PIMCO 25 Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: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 27.40 years. This fund has a decent level of $165.8 million in AUM while sees light average daily volume of 23,000 shares. It charges 15 bps in annual fees and gained 3.5% over the past 10 days.

Vanguard Extended Duration Treasury ETF (NYSEARCA:EDV)

This fund provides exposure to the long-term Treasury STRIPS market by tracking the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. It holds 78 bonds in total with effective maturity of 25.0 years and average duration of 24.6 years. Expense ratio comes in at 0.07%. The product has amassed $579.7 million in its asset base while sees moderate volume of 55,000 shares per day on average. It has gained 3.2% in the same time frame.

iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)

This is the most popular and liquid ETF in the long-dated bond space with AUM of over $7.6 billion and average daily volume of 8.5 million shares. It tracks the ICE U.S. Treasury 20+ Year Bond Index, holding 33 securities in its basket. The fund has an average maturity of 26.17 years and effective duration of 17.58 years. It charges 15 bps in fees per year and added 2.4% in the same time frame.

SPDR Lehman Long Term Treasury ETF (NYSEARCA:TLO)

This fund tracks the performance of the Bloomberg Barclays Long U.S. Treasury Index and holds 48 bonds in its basket. Average maturity and modified duration come in at 25.05 years and 17.60 years, respectively. TLO has accumulated $562.9 million in its asset base while trading in moderate volumes of 66,000 shares a day on average. It charges 10 bps in annual fees and gained 2.3% over the past 10 days.

Vanguard Long-Term Government Bond ETF (NASDAQ:VGLT)

With AUM of $487 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 24.8 years and average duration of 17.4 years. The ETF trades in moderate volumes of around 97,000 shares and has 0.07% in expense ratio. The product is up 2.3% in the same time frame.

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