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Bond ETFs face losses, but TIPS-linked breakevens offer a silver lining
Ishares 7-10 Year Treasury Bond ETF (IEF) is down 2% year to date and the 20+ Year Treasury Bond ETF (TLT) is down 3.3%, while Morningstar links higher yields to sticky core inflation and a changing term premium.
Bond investors are feeling the strain as Treasury yields move higher and duration risk weighs on fixed income exchange traded funds, ETF Trends reports. The iShares 7-10 Year Treasury Bond ETF (IEF) is down 2% year to date, and the iShares 20+ Year Treasury Bond ETF (TLT) is off 3.3%.
ETF Trends says many traditional aggregate bond ETFs are also posting year to date losses, with macroeconomic forces cited as a key driver behind higher yields. It also highlights a view from Preston Caldwell of Morningstar that sticky core inflation, rather than short lived price pressures, matters most for the Fed.
Caldwell points to what he calls a potential upside amid the volatility, including “compelling breakeven rates” on Treasury Inflation Protection Securities, which could increase the appeal of TIPS-linked ETF products such as the WisdomTree Inflation Plus Fund (WTIP). He also argues breakevens appear “dirt cheap” if investors expect inflation to run higher, with one approach described as rotating a portfolio from nominal bonds into TIPS.
ETF Trends also notes the role of the rising term premium, saying it may not signal imminent trouble. Caldwell interprets the term premium increase over the past few years as a reversion toward its historical average, after more than a decade in which central bank purchases compressed the term premium.
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