Seeking Safety in Bonds: June’s ETF of the Month (TLT)

ETF Commentary from Wall Street Sector Selector

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With recent stock market volatility, investors have flocked to bonds in droves and so June’s ETF of the month is TLT, iShares Barlcays 20+ Year Treasury Bond Fund. 

For June, TLT, the iShares Barclays 20+ Year Treasury Bond Fund was the leading performer of the funds I monitor with monthly gains of +5.1%.

All year long, bond funds have been hot and in the week ended June 30, 2010, domestic equity funds had a net outflow of $227 million compared to bond funds which had a net inflow of $4.8 Billion for the same period, according to Investment Company Institute (ICI.org) 

If you’re interested in gaining exposure to the U.S. Treasury market, there are lots of different ways you can do that, including direct purchases, mutual funds or ETFs, and in my view, one of the most efficient ways is via the various exchange traded funds that are offered in the sector. 

Looking at TLT in detail, it is designed to track the total return of the long term sector of the U.S. Treasury bond market and follows the Barclays Capital U.S. 20+ Year Treasury Bond Index.  Its total assets exceed $3 Billion and TLT sports an expense ratio of 0.15% with 86% of its portfolio in U.S. Treasury Bonds that have 25 years or more until maturity.

chart courtesy of StockCharts.com 

In the chart above, it’s easy to see that TLT has been a hot performer for the year, particularly starting in May with recent market volatility and pronounced declines in equity markets. 

The chart sports a “golden cross,” where the 50 Day Moving Average crossed over the 200 Day Moving average in June, indicating the potential for higher prices ahead, and TLT is also well above its 200 Day Moving Average, indicating this ETF is in a long term uptrend according to this widely followed moving average.

The movement of bond prices can tell us several things about interest rates, the bond market, global equity markets and the perceived health of the global financial system. 

Bond prices move inversely to interest rates; as interest rates decline, bond prices rally.  

Bond prices also typically move inversely to stock prices, tending to rise as equity prices decline.  

They also are seen as a “safe haven” when negative events like sovereign debt problems (Greece, Spain) raise their ugly heads or when there is growing investor concern over the safety of the U.S. or global financial system.

Globally, the bond market is double the size of the stock market and many analysts look to it as a gauge of the health of the overall global financial system.  With recent bond market action and the rally in TLT, it’s plain to see that there is plenty of concern afoot and a high demand for the perceived safety of the U.S. Treasury market.

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