The coronavirus concerns continue to roil the markets with a heavy dose of volatility, which has spurred a safe haven move towards assets like bonds. As bond prices move higher on sustained buying, yields subsequently move lower, and this trend could continue as more news out of China permeates the U.S. markets.
“Our big concern is that investors get more and more nervous,” said Wells Fargo Securities’ Michael Schumacher. “We would say that probably the last 25 to 30 basis points mainly in the 10-year is largely due to the virus. It’s really a function of the news flow coming out of China in the near-term.”
At this point, the worst case scenario is that the virus outbreak begins to negatively impact the global economies.
“The worst case I would say with respect to the virus is that it has a massive effect on the global economy and knocks yields down to let’s say somewhere in the low ones for the 10-year,” he added. “It’s a low probability, but it’s not zero in our opinion.”
As the equity markets continue to give investors a rollercoaster ride, they could be hedging their bets with more bonds.
“Will there be a lot of follow on hedging activity by investors who pushed the yield down quickly? We haven’t seen a lot of it so far, but it could happen,” said Schumacher.
The short end of the yield curve is seeing heavy activity, and the 10-year Treasury note, in particular, has been sensitive to the latest coronavirus news.
“For every one percent move in the S&P, it’s worth four basis points maybe in the 10-year,” Schumacher said. “If you saw a downdraft of a couple percent more in stocks, that could push yields back to that 1.44% to 1.45% level.”
In times of low yields like today’s bond landscape, it can help to tilt your allocation towards fixed income exchange-traded funds like the iShares 20+ Year Treasury Bond ETF (TLT ).
As for the fund itself, TLT seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index (the “underlying index”). The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than or equal to twenty years.
Advantages of adding TLT to your portfolio:
- Exposure to long-term U.S. Treasury bonds
- Targeted access to a specific segment of the U.S. Treasury market
- Use to customize your exposure to Treasuries
This article originally appeared on ETFTrends.com.
