Treasury ETFs pull back as Fed signals more aggressive stance

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Treasury yields hit their highest level since May 2019 as government bond prices retreated, but exchange-traded fund investors continued to crowd into Treasury bond exchange-traded funds.

Monday, the iShares 7-10 Year Treasury Bond ETF (IEF) fell by 1.2% and the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT) down 2.2%. Meanwhile, benchmark 10-year Treasury yields rose to 2.297% while 30-year Treasury yields rose to 2.519%. Yields and bond prices have an inverse relationship.

Treasuries fell and yields rose after Federal Reserve Chairman Jerome Powell warned that the central bank was ready to “act more aggressively by raising the federal funds rate by more than 25 basis points.” basic in a meeting or meetings,” reports Bloomberg.

The Fed is eyeing a tightening monetary policy outlook with multiple interest rate hikes to come as the central bank tries to quell rising inflationary pressures.

“We’re moving pretty quickly and seeing the two years meet market expectations for further rate hikes,” Greg Faranello, head of US rates trading and strategy at AmeriVet Securities, told Bloomberg. As companies seek to lock in current rates, “the stars are aligning for a breakout higher in long-term yields. Oil continues to rise, inflation does not come down, and quantitative tightening is approaching.

Atlanta Fed President Raphael Bostic, who leaned toward a less aggressive approach, also said rapidly evolving events “could warrant a quick adjustment in policy trajectory.”

Two other Fed officials have previously said they would be comfortable raising interest rates in even more aggressive increments of half a percentage point.

“Markets, in our view, are underweight the odds that the Fed will need to make more hikes to bring inflation back to target,” Praveen Korapaty, chief global rates strategist at Goldman Sachs Group Inc, said on Friday. , in a footnote.

Meanwhile, bond investors have invested in Treasury bond ETFs after the recent retreat. For example, TLT drew over $1.6 billion in net inflows on Friday alone, marking the biggest single-day inflow since its launch in 2002.

“Now that the Fed has gotten quite aggressive, there is a normalization of the yield curve, so I understand why people would really want to stop and take interest rate risk at levels,” Leslie Falconio, UBS Financial Services, head of fixed income asset allocation in the United States, told Bloomberg.

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