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Treasury ETFs in Focus on Potential Delay in Tax Reform

A key measure of the Treasury yield curve, the gap between short and long-dated treasuries reached a decade low. The gap between 10-year and two-year rates fell below 67 basis points, the lowest since November 2007.


Tax Reform Uncertainty and Bond Auction


Uncertainty is mounting on the timely passing of the U.S. tax reform. After the Democrats emerging victorious in Virginia and New Jersey, house speaker Paul Ryan stated that there is now an increased pressure on his party to pass the promised reforms. However, he indicated that if required, the tax reform will be delayed, owing to Congressional Budget Office’s forecast cost of $1.7 trillion over a decade. Per Washington Post reports, Senate Republican leaders are weighing the impact of a one-year delay in reforms.


Markets believe that uncertainty over the tax reform has increased the appeal of curve-flattening trades. Moreover, increasing uncertainty over whether the government will introduce bonds having a maturity of more than 30 years also contributed to the growing appeal of such trades.


Treasury’s auction of $23 billion of 10-year bonds saw high demand. Moreover, an auction of $15 billion of 30-year bonds is also due this week. Markets anticipate a rate hike in December, which is expected to keep the two-year yields intact and further flatten the curve.


Economic Scenario


Changes in U.S. non-farm payrolls were positive as it reflected the largest gain since July 2016. Although 261,000 new positions were created in October compared with expectations of 310,000, the number still shows gradual improvement from hurricane-related headwinds. This is in sync with the market’s expectation of an interest rate hike in December. Per the CME Fed Watch tool, markets price in a 96.7% chance of a rate hike in December.


Let us now discuss a few ETFs focused on providing exposure to U.S. Treasuries (see all Government Bond ETFs here).


iShares 7-10 Year Treasury Bond ETF IEF


This fund seeks to provide exposure to intermediate term U.S. Treasury bonds.


With $7.5 billion in AUM, it charges a fee of 15 basis points a year. It has an effective duration of 7.51 years and a weighted average maturity of 8.27 years. The fund has returned 1.5% year to date but has lost 3.7% in a year (as of Nov 8, 2017). IEF has a Zacks ETF Rank #3 (Hold) with a High risk outlook.


iShares U.S. Treasury Bond ETF GOVT


This fund seeks to provide exposure to U.S. Treasury bonds in a wide-maturity spectrum.


It has AUM of $5.2 billion and charges a fee of 15 basis points a year. It has an effective duration of 6.06 years and a weighted average maturity of 7.60 years. The fund has returned 1.2% year to date but has lost 2.3% in a year (as of Nov 8, 2017). GOVT has a Zacks ETF Rank #3 with a Medium risk outlook.


Vanguard Intermediate-Term Government Bond ETF VGIT


This fund seeks to provide exposure to U.S. Treasury bonds in the five-10 years maturity spectrum.


It has AUM of $1.5 billion and charges a fee of 7 basis points a year. It has an average duration of 5.2 years and an average effective maturity of 5.5 years. The fund has returned 0.8% year to date but has lost 2.8% in a year (as of Nov 8, 2017). VGIT has a Zacks ETF Rank #3 with a Medium risk outlook.


iShares 10-20 Year Treasury Bond ETF TLH


This fund seeks to provide exposure to longer- term U.S. Treasury bonds in the 10-20 year maturity horizon.


It has AUM of $561.3 million and charges a fee of 15 basis points a year. It has an effective duration of 10.24 years and a weighted average maturity of 13.80 years. The fund has returned 3.0% year to date but has lost 3.4% in a year (as of Nov 8, 2017). TLH has a Zacks ETF Rank #3 with a High risk outlook.


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ISHARS-7-10YTB (IEF): ETF Research Reports
 
VANGD-IT GOV BD (VGIT): ETF Research Reports
 
ISHARS-US TB (GOVT): ETF Research Reports
 
ISHARS-10-20YTB (TLH): ETF Research Reports
 
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