NEW YORK ( ETF Expert) -- On Thursday, the 10-year yield broke through the psychological barrier of 2.75%. Since May, the intermediate-term 10-year Treasury has catapulted from a year-to-date low near 1.6% to a year-to-date high of 2.8%.
Clearly, the U.S. Federal Reserve is having trouble persuading investors that -- absent its $85-billion-per-month bond binge -- they have the tools to suppress longer-term interest rates.
Perhaps ironically, if the Fed announces any tapering of its quantitative easing (QE) program in September, many project that it will be a modest move from $85 billion to $75 billion. Think about that for a moment. Bernanke's central bank may or may not slow the purchasing of U.S. Treasuries as well as mortgage-backed securities. What's more, should the Fed do so, it will be an exceptionally modest reduction. Yet, the 10-year yield has rocketed 75% higher (120 basis points) from 1.6% to 2.8% -- in advance of the Fed and in spite of them.The media have dubbed the speculative exodus from bonds "front-running" the Federal Reserve. Specifically, investors do not wait around for what they perceive as a foregone conclusion; better to get out before the central bank of the United States exits QE and before the demand for U.S. Treasury bonds dissipates. The U.S. stock market via the S&P 500 SPDR Trust (SPY) has experienced a few hiccups with the prospect of losing QE stimulus. However, SPY has been far more resilient than the vast majority of rate-sensitive income producers -- preferred shares, munis, high-yield bonds, longer-term corporates, dividend stocks, REITs, utilities as well as Treasuries. That said, by investigating the reaction of income producers to Thursday's surge in the 10-year yield, we're able to gauge which income ETFs might stand up to the kitchen's heat.
|Income-Oriented ETFs On “Taper Talk” Thursday|
|Approx 8/15 %||3 Mth %|
|Handles The Kitchen Heat|
|iShares S&P/Citi International Bond (IGOV)||0.8%||1.0%|
|PowerShares International Corporate Bond (PICB)||0.2%||-0.8%|
|Market Vectors Investment Grade Floating Rate (FLTR)||0.1%||0.2%|
|PowerShares Senior Bank Loan (BKLN)||-0.1%||-0.7%|
|UBS E-TRACS Alerian MLP (MLPI)||-0.2%||-0.3%|
|Struggling To Handle The Heat|
|PowerShares National Muni Bond (PZA)||-0.3%||-9.9%|
|iShares Investment Grade Corporate Bond (LQD)||-0.6%||-6.0%|
|iShares S&P Preferred (PFF)||-0.9%||-6.6%|
|Vanguard Long Term Bond (BLV)||-1.0%||-10.4%|
|Vanguard REIT (VNQ)||-1.8%||-13.6%|