Year-to-date gains still dominate the US fixed-income landscape for year-to-date results. Except for junk bonds, the rest of the American bond realm is enjoying a bull run in 2020 through yesterday’s close (July 21), based on a set of exchange-traded funds.
The top performer: long-dated Treasuries. The iShares 20+ Year Treasury Bond (TLT) is up a sizzling 24.5% this year. Note, however, that most of the gain was generated in the first four months of 2020. Since then, TLT has been trading in a relatively tight range. Although the fund is holding on to most of its year-to-date rally, the trend for TLT is looking a bit worn these days.
The coronavirus crisis looks set to roll on for the foreseeable future and so there’s no immediate reason to think that long Treasuries are about to suffer. But short of a material change for the worse in the outlook for the pandemic (relative to what’s already known), TLT appears to have fully priced in the risk outlook and so the near-term odds appear low for further upside gains.
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At the opposite end of the performance ledger: junk bonds. Funds targeting short- and longer-term maturities of high-yield securities are posting modest losses year to date.
The SPDR Bloomberg Barclays High Yield Bond ETF (JNK) has the deepest setback: a 1.6% decline through yesterday’s close. Note, however, that the ETF’s upside trend remains positive as the fund’s rally off the March low continues.
After yesterday’s 0.5% increase, JNK closed at the highest price since March 5 and so the fund has erased all the coronavirus-triggered loss.
Meanwhile, the US bond market overall continues to enjoy a strong year-to-date gain. Vanguard Total Bond Market (BND), a proxy for the US-issued investment-grade fixed-income universe overall, is reporting a 7.4% total return so far this year through Tuesday’s close. Here, too, the upside bias remains intact as the ETF continues to set new record highs.
Although recent results for most corners of the US bond market suggest an ongoing rally, some analysts are becoming concerned that the combination of unusually low yields and high prices is a warning sign for managing expectations.
“People got a little bit carried away, were probably a little bit too positioned, and we forget that bonds often are kind of boring and we’re getting to that stage,” says Peter Tchir, head of macro strategy at Academy Securities. “If you want quick returns, it’s hard to see how you get them with some of these yields where they are. With investment grade and high-yield, you’re back to hoping you can clip a coupon rather than any big price appreciation.”
Nonetheless, profiling all the funds listed above still shows a bullish trend. The momentum profile in the chart below is based on two sets of moving averages. The first measure compares the 10-day average with its 100-day counterpart — a proxy for short-term trending behavior (red line in chart below). A second set of moving averages (50 and 200 days) represent an intermediate measure of the trend (blue line). Data through yesterday’s close indicates that an upside bias still prevails. All the funds are posting a bullish trend for the short-term profile while the majority of bond ETFs are enjoying an upside bias for the longer-term measure.
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