U.S. Treasury ETFs Rise On Yuan Devaluation

By | August 13, 2015

Scalper1 News

The global investing world across asset classes was caught off guard on August 11 as Chinese policymakers devalued the country’s currency by 2% against the greenback to boost its waning export profile. The step resulted in the largest single-day decline since the historical devaluation in 1994 , after China arranged its official and market rates in a line. As a result, yuan has now plunged to a four-year low level. The Chinese central bank defended its currency intervention ‘as a free-market reform’, but global experts apprehend a currency war in the near future, especially among the Asian tigers. Most export-centric economies are likely to resort to currency devaluation to rev up their exports. However, yuan devaluation took the global markets in its grip as most asset classes were in red. In fact, the move was criticized by U.S. lawmakers and viewed as means of taking undue favor in exports. Bloodbath in global equities, commodities and currencies spurred a flight to safety for a valid reason. Several ETFs on safe haven assets including greenback-based PowerShares DB US Dollar Index Bullish Fund (NYSEARCA: UUP ) and gold bullion-based SPDR Gold Shares (NYSEARCA: GLD ) added gains on August 11. UUP gained 1.5% after hours and GLD added 0.5% in the key trading session. Here investors should note that the UUP’s strength came mainly on the back of Yuan devaluation and the looming Fed rate hike concern; a safe haven criterion played a lesser role for its ascent. On the other hand, though gold advanced for a day, we are skeptical about its momentum as the metal is due for a southward ride (presumably) in the near term due to a number of issues. In fact, this yuan devaluation will likely curb the import demand of gold from China (a key gold consuming nation) as a feebler currency will turn imports pricier. U.S. Treasury: True Safe-Haven In such a backdrop, investors started to position themselves for the imminent volatility in the risky assets and started to park their money in the safer U.S. treasuries, despite the Fed rate hike worries. Most U.S. treasury ETFs, specially the long-dated ones, added considerable gains on August 11. Yields on the U.S. benchmark 10-year notes, slipped to 2.15% on August 11 from 2.24% the day before. Below we have highlighted four Treasury ETFs that have hogged investors’ attention lately and added gains despite the looming rate hike concerns. Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ) This fund provides exposure to the long-term Treasury STRIPS market by tracking the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. The fund holds 71 bonds in total with effective maturity of 25.2 years and average duration of 24.8 years. Expense ratio comes in at 0.12%. The product has amassed $379.2 million in its asset base. Its gains came in at 2.14% in the yesterday’s session (on August 11). Pimco 7-15 Year U.S. Treasury Index Fund (NYSEARCA: TENZ ) The fund looks to track the returns of the BofA Merrill Lynch 7-15 Year US Treasury Index. The index is unmanaged and tracks the performance of the direct Sovereign debt of the U.S. Government with at least $1 billion in outstanding face value and a remaining term to final maturity of at least 7 years and less than 15 years. The fund has amassed over $24 million in assets so far and charges 15 bps in fees. The fund holds 15 bonds in total with effective maturity of 9.03 years and average duration of 7.89 years. TENZ was up over 2.8% in the last session. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) The ultra-popular long-term Treasury ETF – TLT – tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and has AUM of $4.92 billion. Expense ratio comes in at 0.15%. Holding 29 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.82 years and effective duration of 17.35 years. The fund was up 1.6% on August 11. SPDR Barclays Capital Long Term Treasury ETF (NYSEARCA: TLO ) The fund considers U.S. treasuries that have a remaining maturity of 10 or more years. The $201 million-fund holds 45 securities with average maturity of 24.98 years and effective duration of 17.23 years. The fund charges 10 bps in fess and was up about 1.5% on August 11. Bottom Line Having said this, we would like to note that the bond market is in a volatile mood. Especially the U.S. fixed income space is in a tug of war between safe haven demand and the imminent Fed rate hike. Though U.S. benchmark yields fell lately, any hint at Fed policy normalization will once again push up interest rates. So, edgy investors need to be hawk-eyed before playing the safe-haven fixed-income securities in this choppy market. Original Post Scalper1 News

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