Thanks to an ongoing bout of global equity market volatility, fixed income exchange traded funds have been popular with investors during the third quarter.
Six of the current quarter’s top 10 asset-gathering ETFs are bond funds, a group that includes the iShares 7-10 Year Treasury Bond ETF (IEF) . With over $2 billion in third-quarter inflows, IEF is the second-best asset gatherer among all bond ETFs this quarter.
Dwindling inflation expectations has bolstered demand for long-term maturities. The spread between two- and 30-year securities dipped for a fourth day after contracting to as little as 208 basis points Monday, the least since April 28, Bloomberg reports.
Long-term Treasuries have strengthened and yields dipped on the continued decline in oil prices helped push down inflationary pressures. Meanwhile, short-term Treasury yields have been anchored as speculators bet on a slow interest rate hike from the Federal Reserve. [Good News for Treasury ETFs]
Low inflation also preserves the value of fixed-income assets and lift real yields.
Diminish expectations that the Federal Reserve will boost borrowing costs next week are also helping prop Treasury ETFs like IEF as are eager foreign buyers of U.S. government debt.
European investors are betting that U.S. bonds have more or less priced in a Fed interest rate hike, so any further further strength in the U.S. dollar relative to the euro could compensate them if the U.S. bonds dip on a tighter Fed monetary policy – a stronger greenback would add to USD-denominated Treasury bond yields when converted into the weaker euro for European investors. [Demise of Treasury ETFs Over-exaggerated]
Additionally, IEF’s technical outlook is bullish,which could be a harbinger of more near-term upside to come for the ETF.
“One of the most commonly used long-term technical buy signals occurs when the 50-day moving average crosses above the 200-day moving average. This bullish crossover marks the beginning of a long-term uptrend. While the two averages haven’t crossed yet on the chart of IEF, traders are anticipating this signal within the coming week or so. Once this buy signal is generated it would not be surprising to see upward buying pressure and it could be enough of a catalyst to send the price back toward the 2015 high of $109.20 ,” reports Investopedia.
The yield and bond’s price have an inverse relationship, so bond funds with long durations would experience large price drops if rates were to rise. In contrast, short-duration bond funds will experience more muted volatility in case of sudden rate changes.