Market Overview

Bond Bulls Flexing Their Muscles Again

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Bond Bulls Flexing Their Muscles Again

Ten-year Treasury yields are off just under 2 percent to start 2017, emboldening some bond bulls. Data confirm as much.

Recent Prowess

January was the best month of inflows to fixed-income exchange-traded funds since February 2015, as global bond ETFs hauled in $16.6 billion, according to recent data from BlackRock. U.S. bond ETFs accounted for $13.6 billion of that total.

January inflows to the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ: TLT), one of the bellwethers among long-dated Treasury ETFs, were relatively modest, but there are some indications professional traders are comfortable betting on more upside for the $5.43 billion ETF.

Expert Commentary

“In other action, there has been a bit of an appetite for out-of-the-money calls in TLT (iShares 20+ Year Treasury Bond) this week involving March 127 strikes. TLT is up about 1 percent this morning, and the fund has not been near 127 since before Trump’s election, but there is still more than a month left until expiration of these options,” said Street One Financial Vice President Paul Weisbruch in a note out Wednesday.

TLT, which tracks the ICE U.S. Treasury 20+ Year Bond Index and holds 34 U.S. government bonds, has an effective duration of 17.3 years, meaning it is highly sensitive to changes in U.S. monetary policy.

What About LQD?

Even amid interest rate concerns, flows to corporate bond ETFs have been solid as the iShares iBoxx $ Invest Grade Corp Bd Fd (NYSE: LQD), the largest corporate bond ETF, saw sizable January inflows. LQD's effective duration is less than half that of TLT's, but its 30-day SEC yield of 3.45 percent is higher than the 2.87 percent found on TLT. Although corporate defaults spiked last year, enthusiasm for junk bond ETFs has also been relatively steady in recent weeks.

Data also indicate traders are reducing bearish bond positions.

“Traders have company in pulling back from bearish bond bets. A survey from JPMorgan Chase & Co. for the week ended Feb. 6 showed net short positions fell among all clients, while data from the Commodity Futures Trading Commission indicate further paring of shorts on five-year contracts among non-commercial accounts,” according to Bloomberg.

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