: ‘It’s been a bloodbath’: Long-term bond ETFs deepen losses after hotter-than-expected jobs report

Exchange-traded funds that buy long-term bonds deepened losses on Friday, as investors weighed a U.S. jobs report that was much stronger than Wall Street anticipated.

Shares of the battered iShares 20+ Year Treasury Bond ETF
TLT,
with $38 billion of assets under management, fell 1.2% on Friday, according to FactSet data. The ETF has lost 12.7% this year on a total return basis. 

Bonds have been under selling pressure, with yields recently soaring as they continued their 2023 march higher on Friday. Longer-term bonds have been particularly hurt in the selloff.

“The path of least resistance continues to be higher for long-term Treasury yields,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management, by phone Friday. “It’s been a bloodbath” for investors who bought long-term Treasurys ahead of their recent yield surge, he said.

BMO Wealth Management has been recommending to clients this year to buy short-duration Treasurys, according to Ma. He said he’s favored the iShares 1-3 Year Treasury Bond ETF, which trades under the ticker SHY. The fund has outperformed long-term Treasury bond ETFs so far in 2023. 

“We’ve been concerned about the prospect of longer-term yields spiking, which they have,” Ma said. He has preferred to “stay shorter-duration” because “we didn’t believe in a hard landing” for the economy. 

The U.S. economy added 336,000 jobs in September, according to a report Friday from the Bureau of Labor Statistics. That was far above the 170,000 of job gains forecast by economists polled by the Wall Street Journal.

Read: Jobs report shows big 336,000 gain in hiring in September. Labor market still hot.

Investors have been adjusting to the idea of the Federal Reserve keeping interest rates higher for longer as it aims to keep bringing down inflation. Although some have worried the U.S. faces a potential recession, which could then prompt the Fed to cut rates, the economy has been chugging along.

Meanwhile, the large amount of borrowing needed by the U.S. government may lead to higher yields.

“A massive supply of Treasurys” has to be absorbed by the market this quarter and into 2024, said Ma. The “reality of supply and demand still speaks to those longer rates still going higher.”

In his view, the yield on the 10-year Treasury note will probably rise beyond 5%, with only “a greater economic slowdown” than currently anticipated possibly derailing that trajectory higher.

Ten-year Treasury yields
BX:TMUBMUSD10Y
rose Friday to 4.783%, climbing for a fifth straight week, according to Dow Jones Market Data.

Meanwhile, the iShares 1-3 Year Treasury Bond ETF
SHY
has seen a total return this year of 1.7% after shares of the fund dipped 0.1% on Friday. FactSet data show. By contrast, the Vanguard Long-Term Treasury ETF
VGLT
ended Friday with a 2023 loss of 11.5% on a total return basis.

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