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Long-Term Government Bond ETFs Decline Despite Expected PCE Data

Published 2024-06-04, 08:04 a/m
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Last week was turbulent for long-term government bond ETFs, driven by sharp movements in Treasury yields in the U.S. and the Eurozone. Despite their negative performance, investors’ interest remained high, with significant inflows recorded.

Volatility in U.S. Treasury Yields

The yield on the 10-year U.S. Treasury experienced significant fluctuations. Starting at 4.46% on Tuesday, it climbed to 4.64% on Wednesday, before closing the week at 4.50% on Friday. The trend reversal at the end of the week was triggered by the PCE inflation data, suggesting that the Federal Reserve still has room to cut rates this year. Core PCE prices showed a slight slowdown in April, while the headline monthly and annual rates remained steady and met expectations.

Eurozone Inflation and Bund Yields

Meanwhile, the German 10-year bond yield also saw notable movements. It rose from 2.58% to 2.69% before slightly retreating to 2.66%, its highest level since mid-November. This increase was driven by higher-than-expected inflation figures in the Eurozone, with the headline and core rates accelerating to 2.6% and 2.9%, respectively. Despite expectations for the ECB to cut rates at the beginning of June, some policymakers have argued for maintaining a restrictive monetary policy for longer due to ongoing geopolitical tensions and military preparations by European countries. Moreover, it should be noted that the ratings agency Standard & Poor’s downgraded France’s credit score from AA to AA- on Friday, the first such downgrade since 2013, citing a deterioration in the country’s budget deficit. Earlier this year, influential rating agencies Moody’s and Fitch had spared France from a lower rating. This downgrade is unlikely to impact the French 10-year yield as France is part of the Eurozone.

Impact on Long-Term Government Bond ETFs

ETFs focused on long-term government bonds suffered due to these yield fluctuations and inflation concerns, losing 0.81% over the week and recording a year-to-date loss of 5.43%. iShares € Govt Bond 20yr Target (NYSE:TGT) Duration UCITS ETF (ETR:IS05) (IS05) fell by 1.56%, while the Amundi Euro Government Bond 25+Y UCITS ETF (LMTH) dropped by 2.20%.

Investor Inflows Persist

Despite their poor performance, long-term government bond ETFs attracted almost €79 million in inflows last week. This suggests that investors are still seeking these fixed-income assets, possibly anticipating future rate cuts or viewing them as safe havens amidst market uncertainty.

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