ETFs that buy long-term Treasury bonds drop sharply after Fed signals higher for longer rates

Exchange-traded funds that invest in long-term Treasury bonds dropped Thursday, as yields continued their march higher in the wake of the Federal Reserve’s meeting on monetary policy.

Shares of the Vanguard Long-Term Treasury ETF
VGLT
finished with a sharp 2.3% drop, while the iShares 20+ Year Treasury Bond ETF
TLT
sank 2.6%, according to FactSet data. The iShares 10-20 Year Treasury Bond ETF
TLH
slumped 1.9%.

Ten-year Treasury yields jumped after Fed Chair Jerome Powell held a press conference Wednesday on the central bank’s interest-rate-setting policy meeting, which ended with its summary of economic projections pointing to a potential rate hike later this year. Powell said at the briefing that the Fed’s monetary policy needs to stay restrictive to tame still high inflation. 

“The Fed once again alerted the financial markets that the federal funds rate will remain restrictively aloft for longer than generally expected,” said Yardeni Research in a note Thursday. 

Bond yields have skyrocketed since the Fed embarked in early 2022 on an aggressive campaign hiking its benchmark rate to bring surging inflation back down to its 2% target. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
climbed 13.3 basis points on Thursday to 4.479%, the highest since October 18, 2007 based on 3 p.m. Eastern Time levels, according Dow Jones Market Data.

Treasurys with short-term maturities are faring better than long-term U.S. government bonds this year, including on Thursday. 

For example, shares of the iShares 1-3 Year Treasury Bond ETF
SHY
ended in positive territory on Thursday, edging up around 0.1%, according to FactSet data. The fund has returned a total 1.4% this year through Thursday, outperforming the 6.9% loss posted by the iShares 20+ Year Treasury Bond ETF over the same period on a total return basis.

Read: BlackRock launches series of TIPS ETFs as Fed battles inflation

With the Fed fighting inflation this year with higher rates, ultra-short-term U.S. government debt has been attracting investors with yields of more than 5%. The yield on three-month Treasury bills
BX:TMUBMUSD03M
was trading at almost 5.5% on Thursday, FactSet data show, at last check.

Shares of the iShares 0-3 Month Treasury Bond ETF
SGOV
closed Thursday up less than 0.1%, for a total return this year of 3.6%.

Meanwhile, the jump in 10-year Treasury yields weighed on the U.S. stock market. The Dow Jones Industrial Average
DJIA
closed 1.1% lower Thursday, while the S&P 500
SPX
fell 1.6% and the Nasdaq Composite
COMP
dropped 1.8%, according to FactSet data.

Read the full article here