Friday’s ETF To Watch: Barclays 20 Year Treasury Bond Fund (TLT)

by on September 16, 2011 | ETFs Mentioned:

Although the American budget situation continues to be dire, investors still appear to have a robust appetite for Treasury bonds. Demand for 30 Year Bonds, which carry the greatest levels of interest rate risk, hit a bid/cover ratio of 2.85 in the most recent auction, the best since March. With that being said, bid/cover ratios have been slipping in some of the shorter duration securities suggesting an overall mixed bag for Treasury bonds heading into the fall. Now that the European debt crisis appears to be contained, at least for the time being, and euro zone bonds could be on the horizon, it will be interesting to see if in the latest Treasury International Capital Data report, foreign demand for securities was more robust than in recent periods. 

The TIC data, which is released two months following the actual period, looks to give investors an idea of how much foreign demand is out there for long-term U.S. securities. The number measures the monthly difference in value between American purchases and foreign purchases and is generally a positive number representing inflows into the U.S. This is important because robust demand for these securities helps to offset America’s rather large trade deficit, allowing dollars to cycle back into the U.S. once again [Pro Members can see the ex-U.S. Portfolio here].

Unfortunately for the Treasury, demand has been slipping in many recent months as the figure hit $85.1 billion in the January release and has declined all the way down to $3.7 billion for last month’s data. Not only that but the figure has come in below expectations every month since January, suggesting less demand for securities by many foreign investors. Furthermore, the paltry $3.7 billion figure represents the lowest inflow since the reading in July of 2009, the last time investors saw a negative number in the reading.

Given that the reading shows investors the landscape in June, we could see larger inflows into the U.S., especially given the turmoil afflicting Europe at the time. Analysts look for the TIC figure to rise to $27.3 billion, in line with previous months. Of particular concern should be the breakdown between private foreign investors and official institutions as this will show how much central banks and governments in key regions such as East Asia and the Middle East demanded U.S. Treasury securities at the time. It is important that these organizations keep buying securities in large numbers in order to support the trade deficit so any deviation will likely have a huge impact on bond prices in the near future [see Five ETFs For A Tumbling Euro].

Thanks to this report, investors should look for the iShares Barclays 20 Year Treasury Bond Fund (TLT) to remain in focus during Friday trading. The fund is by far the most popular in the Government Bonds ETFdb Category from a volume perspective, trading over 13 million shares a day, and looks to be more impacted than most by the release of the TIC report. TLT tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index which measures the performance of American Treasury securities that have a remaining maturity of at least 20 years, giving the fund an average maturity of 28.1 years [see other long-term bond ETFs here].

Thanks to the broad turmoil in markets and the European debt crisis, investors in TLT have been doing pretty well in 2011. The fund has gained 16.8% in the past quarter and 20.2% since the start of January, crushing equity indexes over similar time-frames. With that being said, if the TIC report comes in weaker than expected, investors could envision less demand by key foreign investors, pushing interest rates up slightly and TLT lower on the day. If, however, the Treasury releases a robust report which shows that last month’s release was just an abberation, look for TLT to continue its winning ways and close the week in the green [see more charts of TLT here].


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Disclosure: No positions at time of writing.