MW Bond ETFs are down in 2025 ahead of highly anticipated U.S. inflation data
By Christine Idzelis
A jump in Treasury yields has weighed on bond funds so far in January
The U.S. bond market is broadly down so far this year, with funds that provide exposure to fixed-income assets hurt by a recent rapid ascent in Treasury yields seen since September.
The iShares Core U.S. Aggregate Bond ETF AGG and Vanguard Total Bond Market ETF BND have each dropped around 1% so far this year through Tuesday, FactSet data show. Longer-term bond funds are more badly bruised in 2025, with the Vanguard Long-Term Treasury ETF VGLT and iShares 20+ Year Treasury Bond ETF TLT each slumping more than 2%.
Bond funds are off to a rough start this year as the 10-year Treasury yield BX:TMUBMUSD10Y climbs toward 5%, a jump that has rattled the U.S. stock market and hurt prices of fixed-income assets. A confluence of investor worries have driven up Treasury yields recently, with investors closely watching the 10-year rate ahead of potentially market-moving inflation data due out Wednesday.
There's been "quite a bit of volatility picking up" lately, said Vishal Khanduja, head of the broad markets fixed-income team at Morgan Stanley Investment Management, in a phone interview.
A "substantial portion" of the 10-year Treasury rate's jump stems from "real yields" rising, with investors appearing to price in expectations for strong economic growth without inflation becoming a problem, Khanduja said. But the climb in the 10-year Treasury rate also signals the market is worried about the trajectory of the U.S. deficit, with investors demanding a higher premium for investing in long-term government debt amid fiscal policy concerns, he said.
The incoming White House administration can't implement new policies "without having to answer to the market," said Khanduja, as investors will be trading on what they expect the policy ramifications will be for the U.S. economy.
Bond-market volatility has risen over the past month, with Treasury yields rising as traders largely expect the Federal Reserve will pause its interest-rate cuts at its next monetary policy meeting in late January - scheduled soon after President-elect Donald Trump enters the White House on Jan. 20.
Against the background of an expanding U.S. economy, investors are navigating a range of worries that includes the risk of inflationary pressures building as a result of potential tariff and immigration policies under Trump.
See: Trump's Day 1: Incoming president looks set to act on tariffs, crypto, energy and immigration
Investors will be watching spending under the next White House and how the U.S. will fund its deficit, particularly if "technicals" in the Treasury market are weakening, said Khanduja.
The yield on the 10-year Treasury fell slightly Tuesday to 4.787%, after finishing Monday at its highest level since Oct. 31, 2023 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
The 30-year Treasury yield BX:TMUBMUSD30Y rose to nearly 5% Tuesday, while the 20-year Treasury rate BX:TMUBMUSD20Ywas slightly above that level, FactSet data show. As bond yields and prices move in opposite directions, the steeper climb in long-term yields this year has particularly punished bond funds with longer durations.
Financial conditions may "start getting difficult for the economy" should the 10-year Treasury rate rise to 5%, warned Khanduja, as "refinancing gets tougher" for borrowers.
Meanwhile, the 10-year breakeven inflation rate indicates the market isn't currently signaling a significant rise in inflation, according to Khanduja.
Still, investors worry that inflation has become stuck above the Fed's 2% target, even after it has significantly eased from its 2022 peak, he said. They will get a fresh reading on U.S. inflation on Wednesday at 8:30 a.m. Eastern time, with the release of the consumer-price index report.
See: Stock investors brace for possibly the 'most important inflation reading in recent memory'
Bond investors were stung by surging inflation during the pandemic, as the Fed responded with aggressive rate hikes to bring it back under control.
While those rate hikes resulted in steep losses in the bond market, they have also left investors with higher starting yields, with total return factoring in a stream of income payments as well as price changes.
Those starting yields are "pretty compelling," said Khanduja, as the U.S. economy is doing well and the balance sheets of companies and consumers are generally strong. He said he currently likes the front end of the yield curve up to five years, as it's primarily driven by the Fed's monetary policy over the next few years.
Exchange-trade funds that target fixed-income assets with effective durations over that stretch of the yield curve have been faring better than the broader U.S. bond market so far this year.
The iShares 3-7 Year Treasury Bond ETF IEI has declined 0.8% so far this year through Tuesday, while the iShares 1-3 Year Treasury Bond ETF SHY has slipped just 0.1% over the same stretch, according to FactSet data.
Last year, the iShares 1-3 Year Treasury Bond ETF returned a total 3.9%, beating the iShares Core U.S. Aggregate Bond ETF's total 1.3% gain.
If the consumer-price index report on Wednesday "comes in better than expected, it should help Treasury bond yields to subside a bit," said Louis Navellier, chief investment officer of money-management firm Navellier, in emailed remarks that he had made during a podcast Tuesday.
-Christine Idzelis
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 14, 2025 17:35 ET (22:35 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments