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The yield curve’s most avoided portion, known as the “belly”, has seen its profile rise this year due to the relatively calm conditions in the bond market. These bonds, which were mostly shunned last year to favor those with shorter time period, include broad market five to ten year notes that were believed to be more vulnerable to an increase in yields in previous market conditions.
Traders’ reception to these core bond funds, however, have started to turn around from 2013’s cold welcome. BlackRock’s iShares 7-10 Year Treasury Bond ETF is now the most traded exchange traded fund that tracks US debt. According to Bloomberg data, it has so far received $2.5 billion in investors’ money while $2.3 billion has been invested in to the investment grade debt targeted Vanguard Total Bond Market fund.
Demand for these bonds rose in the aftermath of the Federal Express' public announcement that early hikes to interest rates will probably not be seen in the US before the middle of 2015 due to downward revisions on the growth of the world’s largest economy.
The strategy has paid off so far as made apparent in the 4.1% return of five to 10 year bonds that follows the example of the 10.6% from those expiring in 15 or more years. Additionally, the difference between yields of securities with maturation periods of one to three years and five to ten year bonds has shrunk by its largest percentage since the end of 2013. Spreads for these yields were reduced by 2.52% to fall to 2.12 percentage points and even hit 2.06 percentage points last month.
