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Why demand is rising for Treasuries and investment-grade bonds

Part 5
Why demand is rising for Treasuries and investment-grade bonds (Part 5 of 5)

Higher bond prices mean a good outlook for Treasuries and bonds

Fund inflow

Despite a decline in the U.S. ten-year Treasury yield, which was down 8 basis points last week, Treasuries’ tradable equivalents, such as the iShares Barclays 20+ Yr Treasury Bond (TLT), posted a fund inflow of $7.1 million. The iShares Barclays 10-20 Yr Treasury Bond (TLH) had an outflow of $74 thousand. In contrast to the U.S. Treasury yield, the U.S. Treasury ETF Bond price was up 2%. Bond prices and yields move in opposite directions. An increase in bond prices leads to a decline in interest rates and a downturn in yields or the rate of return on bonds.

US Treasury and IG BondEnlarge Graph

Investment-grade corporate bond prices were up in line with the U.S. equity market. Both the iSharesIBoxx $ Invest Grade Corporate Bond Fund (LQD) and SPDR S&P 500 ETF Trust (SPY) were up 1% each. Investors were mostly enthusiastic about the market, as was also indicated by last week’s readings on the State Street Investor Confidence Index, which was up 8.7, to 123.0, compared to a revised 114.3 in January. The index has a strong implication on the U.S. equity market, as it measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.

In the short run, we expect U.S. ten-year Treasury interest rates to remain volatile in anticipation of declining economic indicators. However, in the long term, we expect the U.S. ten-year Treasury to increase with the onset of tapering. The U.S. Treasuries are considered a risk-free asset class. If the economy improves, this asset class would see comeback in investor interest, which has been low due to the lower interest rate during the financial crisis. An improved economy would also positively impact investment-grade corporate bonds, as fundamentals for corporates would improve.

To learn more about investing in fixed income securities, see the Market Realist series Will this week’s releases impact the Fed’s March FOMC meeting?

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