Treasury Yield Drop Boosts Long-Term Bond ETFs amid Weaker-Than-Expected Jobs Growth

After trending higher at the end of August, 10-year U.S. Treasury yields have reversed course amid a cooling labour marker, dropping 20 basis points from 3.91% to 3.71%. This move has sparked notable gains across long-term bond ETFs.

Bond Yields Hit Their 2024 Lowest Point

Yields on the benchmark 10-year Treasury note dropped below 3.65% by Friday mid-session, for the first time in 2024, before closing at 3.71%. They are now significantly lower than a 2024 peak of 4.71% at the end of April, and nearly 5% reached in mid-October 2023.The same trend is observed in Europe, where the yield on the 10-year German Bund has dropped 13 basis points from 2.30% to 2.17%.

Government bond yields have shifted this year, partly reflecting investor expectations of evolving Federal Reserve monetary policy. Traders are now confidently pricing in a rate cut by the U.S. Central Bank at the September 2024 Federal Open Market Committee (FOMC) meeting, following a series of rate hikes that brought the Fed Funds interest rate up to 5.50% over 16 months ending in July 2023. The European Central Bank (ECB) has already begun cutting interest rates, reducing its deposit rate by 25 basis points to 3.75% in June. 

Investors are reappraising the role bonds can play in their diversified portfolios given current interest rate trends. Falling Treasury yields reflect economic growth expectations. In this regard, it is striking to note the strong decoupling between stocks and bonds. This week, the former could have partially covered the losses of the latter within balanced portfolios. As an illustration, U.S. Investment Grade Corporate bonds gained 1.13% - proxied by the Bloomberg Global Aggregate Corporate Bond Total Return Index* – while the S&P 500 lost 4.25%. In Europe, the Markit iBoxx Euro Liquid Corporates Total Return Index* was up 0.61% for the week, while the MSCI EMU dropped by 3.72%.

The results are even more striking over the quarter. An equally weighted stock-bond portfolio would have more than offset the losses on its equity portion with the gains accrued on its bond bucket (calculation performed using the abovementioned bond indices):

Long-Term Bond ETFs Move into Positive Territory Year-to-Date

Overall, long-term government bond ETFs have thus recorded a gain of 2.35% over the week, while long-term corporate bond ETFs have increased by 1.74%.

Notable performers include the iShares $ Treasury Bond 20+yr UCITS ETF (DTLA), which gathered an impressive €2.5 billion in assets and achieved a weekly gain of 3.05%. Similarly, the Amundi US Treasury Bond Long Dated UCITS ETF (DJAD) surged by 2.81%.

Here’s a comparison between U.S. Treasury ETFs.

Here’s a comparison between Euro Government Bond ETFs.

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Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.