iShares Short Treasury Bond ETF as Geopolitical Play Instrument

The recent Taiwan visit by Speaker of the U.S. House of Representatives Nancy Pelosi has been widely covered and discussed in international media. However, none of the articles seemed to have been able to catch and evaluate the impact of this political fallout on global markets. Nevertheless, it’s actually bad for USTs, since China remains the second-largest international holder of U.S. Treasuries, and technically it’s just a matter of self-determination for them to start the selloff.

iShares Trust—iShares Short Treasury Bond ETF (SHV) is an exchange traded fund launched by BlackRock, Inc. It is managed by BlackRock Fund Advisors. The fund invests in U.S. dollar denominated fixed rate treasury bonds with remaining maturity of less than or equal to one year. The fund seeks to track the performance of the ICE Short US Treasury Securities Index, by using representative sampling technique.

iShares Short Treasury Bond ETF seeks to track the investment results of the ICE® Short US Treasury Securities Index. The fund invests at least 80% of its assets in the component securities of the underlying index, and it invests at least 90% of its assets in U.S. Treasury securities that BFA believes will help the fund track the underlying index. The iShares Short Treasury Bond ETF has an effective duration of just 0.34%. So, there's very little interest rate risk. SHY, in contrast, unveils a gradually increasing interest rate risk curve with a 1.84 effective duration.

Meanwhile, inflation in the U.S. is still running exceptionally high. June's 9.1% headline CPI advance from the year prior is unmistakable evidence that the Fed is behind the curve. The upshot is that significantly lower commodity prices, falling shipping rates, and inventory growth among retailers are clues that inflation might have topped out. Yet, at the last FOMC meeting on July 27, Fed Chair Jerome Powell admitted that the central bank doesn’t plan further drastic rate hikes – especially, if the economy would be showing more signs of a slowdown. It means, most likely the greatest corresponding UST advance is left behind, and TIPS become the only fixed income instrument offering bona fide anti-inflationary hedge. As a result, TIPS would be traded with increasing premiums against USTs, which would only add momentum to UST decline – especially, in China to decide to start offloading its Treasuries' portfolio in the wake of increasing geopolitical tensions.