Why bond ETFs surged despite Fed rate hike

Who would have thought that on the day the Federal Reserve hiked its benchmark federal funds rate for the third time in six months, interest rates across the curve would plunge? But that’s exactly what happened on Wednesday, confounding many analysts who predicted higher long-term rates.

The Fed made its widely expected move, raising its overnight borrowing rate by 25 basis points to a range of 1 to 1.25 percent, keying off data that showed the U.S. economy at full employment and growing steadily. The central bank’s upgraded “dot plot,” which maps where central bank officials see rates headed in the future, suggests that another rate hike could be coming later this year.

More from ETF.com:
Tech ETFs retreat: Pullback ahead
Here’s what advisors are worried about
Muni ETFs: No summer vacation

But at least for now, the bond market doesn’t care. The 10-year U.S. Treasury yield dropped by 8 basis points to 2.13 percent after briefly touching 2.1 percent earlier on Wednesday, its lowest level of 2017 (bond prices and yields move inversely).

U.S. 10-Year Treasury Bond Yield

In turn, many bond ETFs, such as the $46 billion iShares Core U.S. Aggregate Bond ETF (AGG), hit their highest levels of the year. AGG is now up 2.8 percent, while the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is up 4.6 percent; and the iShares 20+ Year Treasury Bond ETF (TLT) is up 7.1 percent.

Those numbers are particularly impressive considering this was supposed to be a bad year for bonds based on the consensus expectation at the start of 2017.

YTD Returns For AGG, LQD, TLT