This segment features an examination of how cash US Treasury securities and the ETFs based upon them would be expected to react given different interest rate scenarios. This segment not only has has special interest today but should also help traders on future Fed decision days.
Tom and Tony began things with a recap of how bonds and rates have moved in recent years. Those who are new to trading or to trading bonds should pay attention. Even experienced traders can benefit from this memory refresher.
It has been speculated for some time that the September meeting of the FOMC may mark the first time the Fed raises their target for Fed Funds in several years. Price action in the bonds has been volatile.
Based upon the price of the Fed Fund futures contract the market places the expectation of a move (up) by the Fed at 23%. This segment focuses on how the bonds would be expected to react and how bond ETFs would be expected to react.
A graph of US Treasuries was displayed from March 2011 to present. The graph showed the yields of the 30 year, 10 year, 5 year and 2 year through this period. Interest rate changes do affect bonds differently based upon their time to maturity. Longer dated bonds see greater price moves than shorter ones.
Theoretically, If interest rates increase, bond prices will decrease. The reason is that bond holders would not want to receive a lower yield than what is otherwise available. Since the coupon (the interest rate) doesn’t change, the price decreases. Those willing to hold their bonds to maturity, assuming they bought their bonds at par, will lose nothing but opportunity.
Bond ETFs are different. Bond ETFs have no maturity date. Bond ETFs generally have a stated maturity range and must stay within that range. This is either self imposed or because they are designed to follow an index. The fund manager buys and sells bonds to stay within the range. The fund collects the coupons and issues dividends. As bond prices change, so do the prices of ETFs.
A table was displayed of different Bond maturities including the 30 year, 20 year, 10 year, 5 year and 2 year. The table showed the comparable ETF and current ETF yield for each. Another table showed how prices and yield might change if previous high yield marks were me.
The most active bond ETF is the TLT. The bonds in it have an average maturity of slightly less than 27 years. The current yield is 2.6%. A final table was displayed of the theoretical amount the ETF will change if interest rates increase by 0.25%, stay the same or decrease by 0.25%.
Takeaways:
Bond prices may change prior to maturity – this amount differs depending on the length of maturity, the coupon rate, and the change in the interest rate
Longer dated maturities will be affected more by a change in interest rates than shorter dated maturities
Bond ETFs have different risks – they have no maturity, but the fund manager must continuously enter and exit bonds at current market prices
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways, the refresher about interest rate moves and the details of how bonds are expected to act to different interest rate scenarios.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.