Long-Term Bond ETFs Outperforming Stocks in 2014

Bond exchange traded funds are outperforming equities as risk-off sentiment permeates U.S. financial markets.

The iShares Core Total U.S. Bond Market ETF (AGG) , which tracks the broad U.S. investment-grade bond market, including government, corporate and mortgage pass-through securities, is up 1.47% year-to-date while the S&P 500 Index has gained 1.45% and the Dow Jones Industrial Average dipped 1.09%.

AGG has a 5.18 year duration, a 2.09% 30-day SEC yield and comes with a 0.08% expense ratio.

Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT) increased 6.78% so far this year. TLT tracks long-term Treasury bonds, showing an effective duration of 16.55 years. The ETF comes with a 3.51% 30-day SEC yield and a 0.15% expense ratio. [Bond ETFs Help Investors Navigate Changing Market Tides]

Bond ETFs str strengthening this year as benchmark 10-year Treasury yields have shed about 25 basis points. Bond prices and yields have an inverse relationship, so a falling yield corresponds to rising prices.

However, yields on the low end of the curve have been rising after Fed Chair Janet Yellen suggested the fed funds rate may increase by the middle of 2015, Bloomberg reports.

Shyam Rajan, an interest-rate strategist at Bank of America Corp., though, points out that the long end of the yield curve is being supported by longer-term investors who are just sitting on holdings.

For instance, the iShares 1-3 Year Treasury Bond ETF (SHY) has dipped 0.2% since the Fed minutes were revealed last week, whereas TLT has gained 0.7%. [Short-term Treasury ETFs Could Weaken as Fed Withdraws Support]

“Investing in fixed income today is almost the exact opposite of what it was last year,” Rick Rieder, chief investment officer of megamoney manager BlackRock’s Fundamental Fixed Income group and co-head of Americas Fixed Income, said in a CNBC article.

Reider points to longer-dated bonds and potential danger in the so-called belly of the curve around the three- to seven-year duration.

“The distortion last year was in the long end of the curve,” Reider added. “The distortion today is in the front end of the curve.”

For more information on the fixed-income market, visit our bond ETFs category.