U.S. Treasury Bond Funds Unscathed After China Cuts Stake
Many had the belief that the U.S. would be vulnerable to China’s quirks when the latter’s holdings of U.S. treasuries peaked to $1.65 trillion in 2014. China has chopped its holdings of U.S. treasuries by nearly $180 billion, but that sparked hardly any reaction from the treasury markets. Recent data from the Treasury Department showed benchmark 10-year yields dropped 0.6 percentage points despite the biggest foreign holder of U.S. debt chopping its holding between March 2014 and May 2015. China’s Holdings China has not reinvested the proceeds from maturing securities back into the treasuries; leading to a lower stake of nearly $180 billion from its peak. According to the latest Treasury data, China has $1.47 trillion of treasuries. This also includes $200 billion held through Belgium. Nomura has said that several Chinese custodial accounts are located in Belgium. Foreign buyers had played a key role in helping the treasury market boom to $12.7 trillion when the U.S. was trying to finance stimulus programs to come out of recession. China had been an active participant, reflected in the gigantic jump in holdings from less than $350 billion held previously. China is retreating as it looks to raise money to counter the dismal economic growth conditions and the recent market rout. Alternative Buyers Fill the Gap New regulations to avoid another financial collapse have made banks and such firms to buy highly-rated assets. Investors’ cash moved from bank deposits that have record low interest rates into mutual funds; which in turn have accumulated government debt. According to Fed data, stakes in treasuries and debt from federal agencies held by U.S. commercial banks have increased by nearly $300 billion since March 2014 to more than $2.1 trillion. Indirect bidders won 55% of the $1.2 trillion of notes and bonds that have been sold in 2015, up from 2014’s 43%. These indirect bidders include foreign investors and mutual funds. U.S. Treasury Mutual Funds to Buy China’s reduced holdings failed to have any negative impact on U.S. treasuries. It is evident that the alternatives stepped in; wherein many mutual funds too stockpiled substantial holdings. On that note, let’s look at mutual funds that have substantial U.S. treasuries holdings. The following funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. These funds have strong 1-year returns. The 3-year and 5-year annualized returns are also encouraging. T. Rowe Price U.S. Treasury Long-Term (MUTF: PRULX ) invests a major portion of its assets in government affiliated U.S. treasury securities. The rest of the assets are invested in other government-backed instruments. It has a maturity between 15-20 years and may also vary from 10-30 years. PRULX carries a Zacks Mutual Fund Rank #1 and has returned 7.3% over the last 1 year. The 3- and 5-year annualized returns are 2.1% and 6%. The annual expense ratio of 0.51% is lower than the category average of 0.61%. Dreyfus U.S. Treasury Long-Term (MUTF: DRGBX ) seeks total return with capital growth and current income. DRGBX invests a majority of its assets in U.S. treasury instruments. DRGBX may also invest in other instruments which are approved by the domestic government or issued by its entities. DRGBX generally has a duration of more than or equal to 7.5 years and minimum of 10 years of weighted duration of maturity. DRGBX carries a Zacks Mutual Fund Rank #1 and has returned 7.3% over the last 1 year. The 3- and 5-year annualized returns are 2% and 6%. The annual expense ratio of 0.65% is however higher than the category average of 0.61%. Wasatch-Hoisington US Treasury (MUTF: WHOSX ) seeks return that beats inflation with an emphasis on both capital growth and current income. WHOSX invests a lion’s share of its assets in U.S. treasury securities and also in repurchase agreements backed by such securities. WHOSX carries a Zacks Mutual Fund Rank #2 and has returned 10.8% over the last 1 year. The 3- and 5-year annualized returns are 2.8% and 8%. The annual expense ratio of 0.70% is however higher than the category average of 0.61%. Fidelity Spartan Long-Term Treasury Bond Index Fund Fidelity Advantage (MUTF: FLBAX ) invests most of its assets in securities listed in Barclays U.S. Long Treasury Bond Index. The fund tries to replicate the performance of Barclays U.S. Long Treasury Bond Index by using statistical sampling techniques on the back of interest rate sensitivity and maturity among others. FLBAX carries a Zacks Mutual Fund Rank #2 and has returned 8.6% over the last 1 year. The 3- and 5-year annualized returns are 2.9% and 6.7%. The annual expense ratio of 0.1% is lower than the category average of 0.61%. Vanguard Long-Term Treasury Investor (MUTF: VUSTX ) invests a major portion of its assets in long-term bonds whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 65% of VUSTX’s assets will always be invested in U.S. treasury securities. VUSTX maintains a dollar-weighted average maturity of between 15 and 30 years. VUSTX carries a Zacks Mutual Fund Rank #2 and has returned 8.4% over the last 1 year. The 3- and 5-year annualized returns are 2.8% and 6.6%. The annual expense ratio of 0.2% is lower than the category average of 0.61%. Original Post