The year started with overvaluation in the equity market, momentum stock sell-off, geo-political tensions and slowdown in some noteworthy nations like China and Japan (to some extent) which in turn brightened the appeal for safe haven bond assets.
While the U.S. economy is progressing toward the final stage of recovery as evident from the Fed’s steady wrap-up of the QE program, rise in interest rate at some point of time and shortage of cheap dollar to invest in risky assets are inevitable.
In this stage of recovery, the yield curve tends to flatten. With the rising interest rate, corporate profits get squeezed and the flair for bond investing, especially the long-dated ones, returns to the market. Reduced corporate earnings will lead to poorer dividend payout thus hurting investors’ fixed income share in case of equity market investing.
In such a scenario, long-term bond ETFs known for their high yield opportunities should satisfy the craving of yield-hungry investors. Notably, long-term bonds have secured the longest period of gains this year since September 2009.
Why Are Long-Term Bonds Back in the Spotlight?
Across the spectrum of the yield curve, the short-dated bonds remained out of favor since Fed Chair Janet Yellen hinted at hiking short-term interest rates six months after the wrap-up of bond buying program.
Though, of late, the Fed pared down its comments on raising interest rates urgently, most investors and analysts have the impression that short-term rates will be lifted probably mid next year. At the current level, this seems the major driver of the bull run of long-term bonds.
Also, the U.S. economy hardly expanded in Q1 and this lackluster growth should stimulate the appeal for bond investing. Interest rates are also rising slower than earlier feared. The inflationary environment has also been muted, compelling investors not to demand even higher yield to pay costs for inflation risk leading to a rise in long-term bonds (read: Long-Term Treasury Bond ETF Investing 101).
In this backdrop, investors seeking to take advantage of the higher bond prices might try their luck with a long-term bond ETF. While there are a couple of choices in the space, we have highlighted the three ETFs surging the most in the recent past that could be good avenues to park money with higher yields at this time.