Long-Term Bond ETFs See Further Losses


Investors are witnessing deeper losses in exchange-traded funds (ETFs) that invest in long-term bonds, following a surprisingly strong U.S. jobs report. The iShares 20+ Year Treasury Bond ETF (TLT), managing $38 billion in assets, experienced a 1.2% decline on Friday, marking a total return decline of 12.7% for the year, as per FactSet data.

As yields continue to surge, bond prices have come under selling pressure. This has been particularly detrimental to longer-term bonds, encountering significant losses during this selloff.

Analysts are expressing concern, with Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management, emphasizing that the current trend indicates that long-term Treasury yields will continue to rise. He describes the situation as a “bloodbath” for investors who had purchased long-term Treasurys prior to the recent surge in yields.

Against this backdrop, BMO Wealth Management has been advising clients to opt for short-duration Treasurys. In particular, they have recommended the iShares 1-3 Year Treasury Bond ETF (SHY), which has outperformed its long-term counterparts in 2023.

Ma explains that their caution stems from apprehensions about a sudden spike in longer-term yields, an expectation that has now materialized. By staying shorter-duration, they believe they can mitigate the risks associated with a potential rough landing for the economy.

The Bureau of Labor Statistics released a report on Friday stating that the U.S. economy added 336,000 jobs in September—far surpassing economists’ forecast of 170,000 job gains, according to the Wall Street Journal.

In summary, long-term bond ETFs are enduring further losses as investors react to an unexpectedly robust U.S. jobs report. With yields on the rise, long-term bonds have suffered the most, prompting analysts to shift their focus towards short-duration Treasurys as a safer option.

Jobs Report Shows Strong Hiring in September

The recent jobs report reveals a significant gain of 336,000 hires in September, indicating a hot labor market. Despite concerns about a potential recession, the U.S. economy continues to thrive, causing investors to grapple with the Federal Reserve’s decision to prolong higher interest rates as a strategy to combat inflation.

One factor that may contribute to these higher rates is the substantial borrowing needed by the U.S. government. As such, the market will have to absorb a massive supply of Treasurys, leading to the possibility of increased yields. Ma explains that this reality of supply and demand suggests that long-term rates are expected to rise further.

According to Ma’s prediction, the yield on the 10-year Treasury note could surpass 5% in the future, unless there is a greater economic slowdown than currently anticipated. This trajectory upward has been evident as ten-year Treasury yields rose to 4.783% on Friday, marking the fifth consecutive week of increases.

In terms of performance, the iShares 1-3 Year Treasury Bond ETF (SHY) has yielded a total return of 1.7% this year, with a slight dip of 0.1% on Friday. On the other hand, the Vanguard Long-Term Treasury ETF (VGLT) experienced a loss of 11.5% in 2023 on a total return basis, according to FactSet data.

Given these developments, it is clear that the job market remains strong and that investors should be aware of potential shifts in interest rates and bond yields.

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