Treasury Yields Plunge: A Look At Government Bond ETFs

Treasuries have posted gains of 5-10% over the past few months, but they may not be done yet.
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Up until this week, U.S. large-cap stocks have mostly managed to hang on to 2021's gains even though Treasury prices continue to rise. It's a dichotomy that we don't typically see too often and it tends to indicate that there are warring factions trying to determine where the markets are headed next.

As it stands today, the 10-year Treasury yield has fallen more than 50 basis points from its March peak.

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I often say that the bond market tends to be right more often than the stock market. Treasuries are more reflective of economic conditions and data, whereas stock prices are often influenced by emotional and sentimental behaviors.

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Stock prices are being driven today by strong beliefs in both the post-COVID economic recovery and transitory inflation. Most of all, however, they're being driven by trillions of dollars of government stimulus. One needs to look no further than equity fund flows over the past year to see that all that money needs to go somewhere and, in many cases, stocks are that landing spot.

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On average, a billion dollars a week has been moving into equity funds. A lot of investors are buying into this bullish narrative being fueled by the Fed, but I think the Treasury market is more likely than not calling it correctly. Something's not right here and we could be witnessing the beginning of a significant shift in market sentiment. 

  • Utilities are outperforming
  • Treasuries are gaining
  • Commodities are falling
  • Small-caps are underperforming
  • The dollar is rising

Take your pick. They all tell the same story. Risk assets are underperforming across the board.

Treasury ETFs

Although Treasury ETFs are still down year-to-date thanks to the rising interest rate environment we saw during the 1st quarter, solid gains have been had over the past one to three months. The degree of gains has, of course, depended on the maturity of the bonds that are being targeted, but 5-10% gains in intermediate- to long-term Treasuries is what we've seen.

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Where are Treasuries headed from here? I ran this Twitter poll back in June when the 10-year was sitting at 1.5%, a full 30 basis points above where it is today.

Twitter Poll

The majority of respondents felt that it was going to hit 2% before it hit 1%, but it wasn't the overwhelming majority that I expected. Inflation rates had already been rising rapidly and that tends to correspond with higher Treasury yields. Instead, we've seen the opposite. I have a sense that all of this liquidity has pulled the consumption curve forward, but that's going to lead to a deflationary environment in 2022.

The debt ceiling expiration at the end of July could be the big catalyst that drives yields lower from here. When U.S. government debt got downgraded back in 2011, yields plunged even though the government eventually agreed to raise the debt limit and borrowing activity resumed like normal. The implication of being overleveraged is where the real damage was done.

As we approach $30 trillion of debt and no real plan for bringing that number even modestly lower, if at all, I think Treasury yields are going to continue pushing lower. The next couple of weeks could be very important to the direction of the markets over the remainder of 2021.

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