ETF News & Views: Long-Term Government Bonds Shine as the U.S. Economy Slows (April 24 to 30, 2023)

The U.S. 10-year Treasury yield decreased by 15 basis points from 3.57% to 3.42% week-over-week, and the yield on the 2-year Treasury fell by almost 18 basis points to 4% amid a slowing economy. As per the Bureau of Economic Analysis, the U.S. saw a 1.1% annual growth in real GDP for Q1 2023, down from 2.6% in Q4 2022.  

The Federal Reserve is set to deliver one more 25 basis-point increase in May before pausing for the rest of the year. Yet, recession risks are rising in the U.S., as evidenced by the latest March ISM manufacturing PMI falling to a 21-month low of 46.3 from 47.7 in February. This marks the fifth consecutive month in contraction territory, and is the reason why Fed funds futures contracts are predicting a rate-cut in Q4 2023. The year-end rate is expected to be just below 4.50% compared with a current target range of between 4.75%-5% (i.e., before the Fed’s decision on 3 May).  

ETFs invested in U.S. long-term treasuries performed positively in the last week of April – with, for example, the Invesco U.S. Treasury Bond 10+ Year UCITS ETF – GBP Hedged gaining 2.591%. 

In Europe, government bond yields followed suit. The German 10-year Bund yield decreased by 17 basis points to 2.31% from 2.48%, while the yield on the French 10-year OAT lost 15 basis points, dropping to 2.90% from 3.05%. This allowed long-term government bond ETFs such as the iShares € Govt Bond 20yr Target Duration UCITS ETF to gain 2.507% over the week. 

Last but not least, credit ratings agency Fitch has downgraded France's debt worthiness on 28 April by one notch to "AA-" from "AA", citing “weak fiscal metrics”, “uncertain revenue trajectory”, a “high level of debt”, and “higher interest expenses” as major risks. This brings the euro area’s second-largest economy to the same level as countries such as Ireland and the Czech Republic. However, this decision did not result in a spread widening between the France 10-year OAT and the Germany 10-year Bund, which stands below 60 basis points.  

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