The 30-year Treasury yield jumped to 5.23% after Federal Reserve Chair Kevin Warsh's July 29 press conference failed to convince bond investors the Fed is focused on inflation. The Fed had just voted to hold interest rates steady at 3.50% to 3.75%, but analysts quoted by CNBC called Warsh's remarks confusing and contradictory. Motley Fool analyst Ben Gran said the yield spike makes him prefer the shorter-duration IEI over the long-duration TLT.
The 30-year Treasury yield climbed 14 basis points to about 5.23% immediately after Fed Chair Kevin Warsh's July 29 news conference, its highest level in 19 years.
Warsh leaves bond investors unimpressed
Federal Reserve officials voted to leave interest rates unchanged at 3.50% to 3.75% at their meeting that week, but Warsh left bond investors unimpressed in the news conference that followed. Other Fed officials have recently said inflation is still too high, yet Warsh was unclear about what it would take for the Fed to raise rates again, feeding worry that the Fed is not focused on curbing inflation.
Analysts quoted by CNBC said Warsh's press conference raised "questions about the new chair's credibility" in reducing inflation.
Long-duration Treasury ETF underperforms
The iShares 20+ Year Treasury Bond ETF, or TLT, holds 46 U.S. Treasury bonds with a weighted-average maturity of 26.06 years and posted a 30-day SEC yield of 5.13% as of July 29. Its annualized returns have been negative: -1.93% over the past 10 years and -6.66% over the past five years. Rates have been rising since 2022, and long-duration bonds carry more interest rate risk than shorter ones, so further increases under Warsh would bring more pain to holders of long-term Treasury funds.
Shorter-duration fund holds up better
Meanwhile, the iShares 3-7 Year Treasury Bond ETF, or IEI, holds 83 intermediate-term bonds with a weighted-average maturity of 4.7 years and a 30-day SEC yield of 4.23%. It has delivered annualized returns of 1.2% over 10 years and 0.35% over five years, avoiding the losses posted by longer-duration funds over that stretch.
Motley Fool contributor Ben Gran said he would choose IEI over TLT because its shorter-duration bonds are less exposed to further rate increases, though past performance does not guarantee future results. Unless inflation gets back to normal soon, or Warsh convinces bond investors the Fed is serious about reducing it, Gran said, long-term Treasury funds feel too risky for his own portfolio.
Source: Fool
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