Treasuries Yields Rally, ETFs Fall (IEF, TLT, TBF)
The yield on the 10-year U.S. Treasury bond hit 3.0 percent for the second time this year as investors prepared for more tapering from the Federal Reserve. The yield is the highest since September and on the verge of the highest level since 2011.
There is an inverse relationship between interest rates and bond prices. As interest rates move higher the value of the underlying bond will decrease in value.
The iShares 7-10 Year Treasury Bond ETF (NYSE: IEF) is down 3.5 percent in the last two months and is trading at three-month low. Since hitting an all-time high in 2012 the ETF is down 10 percent, however the downtrend may only be in the early stages. If interest rates on the 10-year move back to where they were in 2007 it would send IEF down another 20 percent.
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The long bond ETF, iShares 20+ Year Treasury Bond ETF (NYSE: TLT) has been hit even harder by rising interest rates. Typically the longer the maturity of the bond, the more exaggerated the moves when interest rates increase. Since its high in 2012, TLT is down 22 percent and today it is set to close at the lowest level in two years.
With the taper underway and the U.S. economy set to increase the pace of growth next year the overwhelming consensus is that interest rates will continue to increase into 2014. A long-term chart of the yield on U.S. Treasuries of all maturities shows that the upside potential for interest rates is very high.
Investors that agree with the consensus could consider the ProShares Short 20+ Year Treasury ETF (NYSE: TBF). Because the ETF is short long-term Treasuries, the ETF will increase in value as bond prices fall and interest rates increase. The ETF is up 0.3 percent today and close to a multi-month high. So far this year the ETF is up 12 percent.
The long-term trend is that interest rates will move higher and U.S. Treasuries will fall in value. With that being said, the path to higher interest rates will not be a straight line higher. Investors should consider using pullbacks in TBF as buying opportunities in early 2014. The other move investors should consider is selling any U.S. Treasury ETFs that are long bonds. The interest payments on the ETFs will not make up for the loss in value of the ETF and the end result will likely be a losing investment.
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