I’d wager that almost nobody today is buying U.S. Treasuries for their yield. The yield on the 10-year Treasury broke below 1% to 0.9043% for the first time EVER. The 10-year finished the day with a yield of 1.01%. The yield on the 2-year Treasury fell to a low of 0.6223% before closing at 0.71%.
But traders and investors are buying.
They’re buying for safety: For the relative safety of the very deep liquidity of the Treasury market and the relative strength of the U.S. dollar. And the fact that Treasuries aren’t stocks and therefore have much less exposure to any slowdown in economic growth.
And they’re buying for capital gains if Treasury yields fall further and prices of existing Treasuries climb.
I’ve got a number of Treasury ETFs in my online portfolios. My Jubak Picks Portfolio owns iShares 7-10 Year Treasury Bond ETF (IEF), Vanguard Short-Term Treasury ETF (VGSH) and Vanguard Intermediate-Term Treasury ETF (VGIT). In my Volatility Portfolio I own those same three ETFs. My Dividend Portfolio owns the iShares 7-10 Year ETF.
Those ETFs have done well, especially recently. The best performer has been the iShares 7-10 Year ETF in my Dividend Portfolio, which is up 6.88% since I aded it to the portfolio on November 11, 2019. (Other positions in that ETF were added earlier in August 2019 and have only gained 4% or so.) The laggard has been the Vanguard Short-Term Treasury with a 1.55% gin in the Volatility Portfolio since July 2019 and 1.08% in the Jubak Picks Portfolio since June 2019.
Now what?
I certainly don’t want to reduce my Treasury holdings now that the Federal Reserve has announced an “emergency” 50-basis-point interest rate cut that has convinced investors and traders that we’ll see another 50 basis-points in cuts by the central bank’s June meeting.
The issue now is what maturity or maturities to own. The iShares 7-10 Year ETF has been an outperformed during both the period that I’ve owned it and recently with a 2.89% gain in the last month.
But I’d make a case that the lagging Vanguard Short-Term ETF is a better bet right now with an increasing percentage of the talking heads talking about the Fed taking its short-term benchmark rate to 0% in 2020. (Some of the thinking is “miraculous.” I heard one commentator say that when (not “if”) the Fed cuts to 0.5% to 0.75% in June, it might as well go all the way to 0%.)
The yield on the 2-year Treasury note closed at 0.71% today. The 10-year Treasury yield was 1.01% at the close.
The 2-year note is more sensitive to the Fed’s short-term rates than the 10-year Treasury is, so I think its got more momentum to lower yields here than the 10-year.
As of tomorrow March 4, I’m adding shares of the Vanguard Short-Term Treasury ETF (VGSH) to my Dividend Portfolio. Please note this is NOT a yield buy although the 12-month yield was 2.27%. I don’t expect the ETF to match that going forward
