Analyse: iShares Barclays Capital $ Treasury Bond 7-10

Fundamentale Analyse

The US economic recovery is proceeding at a moderate pace. Domestic private consumption, though showing some improving signs, remains hamstrung by the mix of uncertain labour and housing market conditions. Meanwhile, private sector investment growth has slowed in 2012 in sync with a deterioration of global economic conditions. As a result, the US economy is still unable to generate enough new jobs to allow for a substantial and sustained decrease in the jobless rate. In general terms, measures of confidence, both for consumers and businesses, remain below historical averages. The balance of risks to the US general economic outlook are skewed to the downside, with unresolved problems in the Eurozone as a key cause for concern.

Against this general backdrop, the US Federal Reserve (Fed) remains committed to a very accommodative monetary policy stance. Fed Funds have been held in a 0.00-0.25% target range since December 2008, and as we write (e.g. October) the Fed expects that current and expected economic conditions are likely to warrant exceptionally low levels of Fed Funds rate at least out to mid 2015. The relative weakness of private consumption, the absence of wage-led pressures and some downward pressure on oil prices in 2012 are keeping inflationary pressures broadly at bay. The FOMC underlines that both the measures of underlying (e.g. core) inflation and long-term inflation expectations remain at levels below what they consider consistent over the long run with its policy mandate.

Additional policy stimulus, particularly targeted at unclogging financial lending channels, push long-term interest rates down, and ultimately avoid a deflationary trap, have came via a large-scale programme of asset purchases, known as quantitative easing. It is estimated that the Fed holds over USD 2Trn of US Treasuries, agency debt and mortgage backed securities (MBS). In September 2012 the Fed approved a new round of purchases of MBS (e.g. QE3) – mainly 15y and 30y – at a pace of USD 40bn per month. Meanwhile, the Fed is expected to conclude the so-called “operation twist” by end 2012 whereby a total of USD 667bn of held assets with remaining maturity of 3y or less will have been sold in order to purchase an equal amount of assets with remaining maturities of 6y-30y. The combined operations are designed to exert downward pressure on long-term interest rates with a view to revitalise the housing market.

Although the Fed’s buying programme of long-dated US government bonds may exert downward pressure on long-dated yields, would-be investors in fixed income should also take into consideration that this would come hand in hand with an upshot in prices for those securities, which might support the overall returns equation. Besides, with the sovereign debt crisis in the Eurozone still casting a shadow over the global financial markets, investors can take comfort from the fact that the US Federal Reserve remains disposed to continue acting as “borrower of first resort” in the US Treasury market. It is fair to assume that further worsening of global financial conditions would benefit US Treasuries on safe-haven flows.

Indexkonstruktion

The Barclays US Treasury 10y Term Index is produced by Barclays Capital. The objective of the index is to measure the performance of fixed-rate 10y-dated government bonds issued by the US government until they fall under 7 years to maturity. Term indices are a Barclays Capital in-house indexing methodology which uses standard market capitalisation weighting on a bond universe made up of issues near their original term rather than selecting all bonds in the maturity bracket. The index is calculated on a daily basis using mid-market prices from the Barclays Capital market makers at 15:00 New York time. The index is reviewed and rebalanced once a month on the last calendar day of the month. At rebalancing, bonds eligible for inclusion in the index must have an original term of between 9 and 10.5 years, a minimum calculated life of 7 years and a minimum outstanding of USD 5bn. The index must contain a minimum of six bonds at rebalancing. Income from coupon payments is reinvested monthly at rebalancing. Income received during the month is invested until rebalancing at 1M USD Libor -15bps set at the end of the month for the next month.

Fondskonstruktion

iShares uses physical replication to track the performance of the Barclays Capital US Treasury 10 Term Index. This ETF was launched in December 2006 and is domiciled in Ireland. The restricted bond universe that Barclays Capital uses to construct its term indices allows iShares to fully replicate the basket of constituents, although statistical weightings may differ slightly and this may have an impact on the fund’s tracking performance at the margins. This ETF distributes dividends on a semi-annual basis, with historical data showing a May-November payment pattern. By end September 2012, the fund’s tracking difference since inception, measured in terms of annualised total returns after fees (note – the annual total expense ratio is 0.20%) stood around 0.22%. Performance data on cumulative returns basis shows a good tracking history. In our view this is likely to have been facilitated by the restricted bond universe which Barclays Capital uses to construct its term indices, which in turn simplifies iShares task of fully replicating the basket of index constituents. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. As from June 2012, the amount of securities that can be lent has been capped to 50% per fund. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 60/40 between the ETF and BlackRock, respectively.

Gebühren

The annual total expense ratio (TER) for this ETF is 0.20%. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares.

Alternativen

iShares was quick off the mark with regards to providing European investors with ETFs tracking the US Treasury market, managing to capture the bulk of market share in the process. As we write, iShares remains the dominant force in this particular segment. However, since 2009 other European ETF providers have come to the marketplace in a bid to challenge iShares’ supremacy.

First off was Credit Suisse (CS) with the iBoxx USD Government 7-10 ETF (TER 0.23%), followed by -Amundi with the US Treasury 7-10 ETF (TER 0.14%) and UBS with the BarCap US 7-10yr Treasury Bond ETF (TER 0.20%). At this stage, all these products lag iShares by a very substantial margin in terms of assets under management. The CS and UBS products use physical replication, while the Amundi ETF is a swap-based product.

Other European providers such as db x-trackers, Lyxor and SPDR offer ETFs tracking the US Treasury market, either on a broad or maturity-segmented basis. However, as we write none offer an ETF covering the specific 7-10y maturity segment.