Friday’s ETF To Watch: iShares 1-3 Year Treasury Bond Fund (SHY)

by on June 10, 2011 | ETFs Mentioned:

Thanks to continuing fears over the debt situation in Europe, as well as concerns over the health of the American economy, demand for safe haven investments has been soaring as of late. While gold has held up during this time period, the real focus has been on Treasury bonds which have seen the vast majority of inflows, pushing yields down towards historic lows. In fact, the 10 Year is now yielding below 3.0% while the Two Year Note is hovering around the 0.40% mark, suggesting investors are growing increasingly concerned about the short and medium term economic picture. However, worries over the U.S. debt level should be giving many investors pause before accepting such low yields in these securities, especially considering an outright default is not out of the question later this year should a hike to the debt ceiling not be approved. 

In light of this, investors should pay special attention to today’s release of the May Treasury Budget deficit figures, which could shed further light on the U.S. government’s problems in terms of keeping debt under control. The consensus estimate calls for a a deficit of $140 billion for the month, far above the $40.5 that investors saw in April. However, it is important to note that the budget can see wide swings from month-to-month thanks to the collection of taxes, a factor which makes sequential month comparisons unhelpful.

As a result, investors should instead look to how previous May budgets performed in order to get a sense of the trend in the economy.  According to Bloomberg, over the past 10 years, the average deficit for the month of May has been $90.0 billion and $120.4 billion over the past 5 years. Meanwhile, the May 2010 deficit came in at $135.9 billion suggesting that the budget picture is slowing worsening when compared to last year. If this is the case, it could signal that investors need to be more concerned about their Treasury holdings and question if the ultra-low yields are worth the ever-increasing risks associated with the market [Bond ETFs: 12 Stops Along The Risk/Return Spectrum].

Thanks to this data release, investors should look for the Barclays 1-3 Year Treasury Bond Fund (SHY) from iShares to remain in focus throughout today’s session. The fund tracks the Barclays Capital U.S. 1-3 Year Treasury Bond Index which measures the performance of U.S. Treasury securities that have a remaining maturity of at least one year and less than three years. The product has been rising modestly so far this year although less so than some of its longer term counterparts that are more sensitive to changes in interest rates. Nevertheless, the fund could be in focus thanks to today’s release of the May budget report and could see further movement towards its all-time low yield. Should the Treasury budget surprise on the downside, it could potentially signal to investors that the U.S. economic situation is worsening, possibly pushing SHY lower on the day as investors look for other assets that pay a yield that is commensurate with risk. If, however, the numbers manage to surprise on the upside, it could signal an improving economic situation which could restore some level of confidence in investors’ minds regarding the government’s ability to get budgets under control, a situation that could cause yields to tumble again to close out the week [see Treasury ETFs: Filling In The Duration Spectrum].

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Disclosure: No positions at time of writing.