The majority of the market remains in turmoil, but one asset class has seen strong returns during crisis
Last week, National Bank of Canada Financial Markets (NBCFM) ETF Research published a note on “Pandemic Survival Strategies.” The report looked at how different asset classes have been affected by the spread of COVID-19 using ETFs as benchmarks for asset classes. While some have simply not been hit as hard, such as gold and market neutral alternative strategies, one asset class stood out with a spike beginning February 20: long-term US treasuries.
The report looked at how two ETFs, that offer exposure to long-term US treasuries, BMO’s Long-Term US Treasury Bond Index ETF (ZTL) and TD’s US Long Term Treasury Bond ETF (TULB) netted returns of 12.5% and 14.3%, respectively, during the period of Feb. 20 - March 12. As of March 20, ZTL was valued at $68.76, while TULB was at $30.36, both approximately the same value as when NBCFM filed their report.
The spike in treasuries is something that has been seen in the past. Alfred Lee, director, portfolio manager and investment strategist, BMO GAM, said that during times of a selloff, it is an asset class that has been seen as a safe haven. “If you look at the market, and risk assets in general like the S&P 500, the market is selling off. The velocity to sell off this time is higher than what we saw in 2008, where I don’t believe we saw as many circuit breakers.”
For Lee, long-term government bonds offer three main advantages in trying times. “US treasuries are an area people can find liquidity and long duration. When risk is selling off, central banks will tend to lower interest rates, as we have seen. So, from a duration perspective, US treasuries tend to benefit as well. The last trifecta, especially if you are Canadian, is the US dollar exposure. In the last couple weeks, we saw the USD appreciate quite a bit, because in an ultimate risk-off environment, people move towards the USD.”
Lee adds that in 2008 the Yen saw a similar phenomenon, but the reason US treasuries get attention is because of their appeal across the globe. “When you look at the US treasuries, it is like a global asset class. Investors all around the globe move towards US treasuries in a market like this where there is a demand for liquidity.”
The reason why the ETFs have seen the returns they have is also a result of the diversification within them. Lee points out that owning US treasuries in the form of an ETF can be more efficient because investors gain access to a basket rather than just one bond.
When it comes to risks, Lee adds that duration is the biggest but believes if investors are adding long-term US treasuries to a mix of other investments, they can help to smooth out the ride and improve portfolio efficiency.