Is The Treasury Bond ETF Rally Over?

U.S. Treasury bonds have had a dream rally so far this year with long-dated bonds like PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund (ZROZ – ETF report) adding 21.1% (as of September 12, 2016), Vanguard Extended Duration Treasury ETF (EDV – ETF report) advancing over 18.9% and iShares 20+ Year Treasury Bond ETF (TLT – ETF report) inching up about 12.5%.

A host off factors aided the bond market rally, defying the likely negative impact from the Fed liftoff in December 2015. Hard landing fears in China and oil price volatility roiled the market in Q1 and an extremely shocking event like Brexit in the final month of Q2 flared up risk-off trade sentiments and boosted safe havens like Treasury ETFs. In fact, post Brexit, the yield on the benchmark U.S. 10-year Treasury note even dropped to record lows (read: Brexit Fuels a Global Rally in Bond ETFs).

Dream Run of U.S. Treasury to Lose Momentum?

The spell of low bond yields seems to be turning the corner lately as rate hike talks are back with a bang. The talks, which were put back following the lackluster U.S. job, manufacturing and service sector data for the month of August, flared up lately on hawkish comments by a Fed official (read: Best Sector ETFs for a Rising Rate Scenario).

Investors should note that the Fed Bank of Boston President Eric Rosengren showed confidence in labor market strength and expects U.S. GDP growth to score above 2% over the coming two quarters. According to Rosengren, “”if we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate.” He also noted that “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.”

All these comments stirred rate hike talks strongly on September 9. This in turn caused a carnage in the bond market with “30-year Treasuries recording their biggest two-day selloff in more than a year.”