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Friday’s ETF To Watch: iShares Barclays 20 Year Treasury Bond Fund (TLT)

September 23rd, 2011

Eric Dutram: Due to the extremely weak economy at home and growing troubles abroad, many analysts had looked for the Fed to add more to its easing programs far beyond the pretty much guaranteed ’Operation Twist’. However, this was not to be the case as Bernanke and Company were only willing to offer the market a $400 billion twist and nothing more. As a result, investors looked at the broad scope of data on the table– risks in Europe, more gridlock in D.C., poor levels of job creation at home– and combined this with a lack of further stimulus to sell-off stocks in droves. Seemingly, one of the few safe havens as of late in this environment have been longer term Treasury bonds which are benefiting from both the risk off trade as well as the impact of Operation Twist.

In fact, demand for Treasurys has been especially robust over the past few days as yields on the 30 Year bond have plummeted from about 3.5% at the beginning of the month to their current level below 2.8%. Obviously, this is a huge change for such long term debt and it is far greater– both in percentage and nominal terms– than the changes that many of the shorter term securities have seen over the same time period. Undoubtedly part of the push to longer term Treasury bonds has been because of the massive amounts of long duration bonds that the Fed looks likely to scoop up in the coming months. According to the New York Fed, roughly 29% of the purchases in the $400 billion Twist program will be targeted at the long end (20-30 years) period of the curve. If they are to follow through on this, “Almost the entire supply of bonds will be offset by Fed purchases through June 2012,” Credit Suisse’s head of U.S. rates strategy Carl Lantz wrote in a note Thursday [see Three ETFs For Operation Twist].

Due to these large quantities being taken out of the market, Credit Suisse also believes that yields on 30 Year debt will hit 2.5% by the end of the year, just below their all-time record low in the 2008 crisis. Given the robust demand for Treasury securities as of late and the added benefit of Federal Reserve buying, investors could easily see this target met which would help to push bond prices even higher over the next few months, potentially adding to the solid performances that many have seen so far in 2011 out of their bond holdings [see all the Treasury Bond ETFs here].

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Thanks to this, investors should keep a close eye on the Barclays 20 Year Treasury Bond Fund (NYSE:TLT) to close out this week’s trading. The fund tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index which measures the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years. Currently, close to 95% of the fund’s portfolio is in securities that are at least 25 years away from maturity, giving the fund an average maturity of about 28.1 years. In terms of yield, TLT is tough to beat in the Treasury bond space, paying out investors a 30 Day SEC Yield of about 3.1% [see the Analyst Take of TLT here].

If yesterday’s sell-off in equity markets and the subsequent push to bonds turns out to just be a panic sell by worried investors, we could see TLT give up much of its solid gains from yesterday’s trading session in which the fund added 3.8%. The level of bond buying that took place yesterday– volume on TLT was nearly double the average– suggests that a rush to bonds took place and at least a modest reversal before the weekend cannot be ruled out. With that being said, the number of positive catalysts that are available for the market are extremely limited and some investors may want to just keep their cash in funds such as TLT in case any bad news comes out of Europe over the weekend. Either way, we could see more volatility out of this ultra-popular ETF to close what has been an extremely volatile and important week [see more fundamentals of TLT here].

Written By Eric Dutram From ETF Database Disclosure: No positions at time of writing.

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