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Risk-Free? — Treasury, High-Yield Bond ETFs Diverge

Aren’t Treasury bonds supposed to be “safer” than high-yield corporate bonds?

That hasn’t been the case recently. Treasury ETFs were among the sharpest decliners this week while high-yield bond ETFs are hanging in there and trying to break out to new multi-year highs.

The iShares Barclays 20+ Year Treasury Bond (TLT) was on track for a loss of more than 3% for the week in afternoon trading Friday. The Treasury fund was in the red after the February jobs report came in stronger than expected. TLT traded lower every day this week.

Yields on the 10-year Treasury note jumped as high as 2.09% on Friday to the highest level since April 2012.

The employment report “added to bond bears’ arguments that as the economy continues to improve, the Federal Reserve may need to cut back or even stop buying Treasury bonds before the end of this year,” Dow Jones Newswires reported. “Yet bond bulls are not convinced the Fed will change its stance on bond buying on this report … Some traders believe that yields at multi-month highs may lure bargain hunting investors and boost demand for the auctions [next week].”

Noted bond fund manager Jeffrey Gundlach made waves with recent reports that he reversed his once-bearish stance on Treasury Bonds. “I bought more long-term Treasuries in the last month than I’ve bought in four years,” Gundlach said in a Reuters report.

Elsewhere in fixed-income ETFs, high-yield corporate bond funds such as iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) were poised for slight gains this week. [Comparing the Two Largest High-Yield Bond ETFs]

In the major U.S. stock indices, the S&P 500 was set for a weekly advance of 2%, the Dow also rose 2% after setting a new all-time high, and the Nasdaq Composite added 2.2%. [Stock Index ETFs: Dow Jones Industrial Average vs. S&P 500]

The S&P 500 is about 2% away from its record high from 2007. “While we continue to make all-time highs, it continues to be live by the Fed, die by the Fed,” said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management, in a Bloomberg report.

Some market commentators believe the huge rally from the March 2009 has been driven by easy monetary policies from the Federal Reserve and other central banks, rather than by improving fundamentals. [Dow ETFs: Industrials, Transports Indices Both at All-Time Highs]

Not including volatility-linked funds, this week’s top unleveraged ETFs were ETFS Physical Palladium Shares (PALL), iShares MSCI India (NYSEArcA:INDA) and Market Vectors India Small-Cap (SCIF) with gains of 6% or more.

The bottom unleveraged ETFs were PIMCO 25+ Year Zero Coupon US Treasury (ZROZ), Vanguard Extended Duration Treasury (EDV) and iShares Barclays 20+ Year Treasury Bond with setbacks of at least 3%.

iShares Barclays 20+ Year Treasury Bond


Full disclosure: Tom Lydon’s clients own TLT, HYG and JNK.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.