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I don't understand the pricing of these two ETFs. I understand the effect of duration risk, thus, making IEF more volatile but this explanation would contradict with the inverting yield curve.

In simple terms, in order for the yield curve to be inverted I would assume shorter-term ETF (SHY) price to drop more than IEF to have a negative yield relation.

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    What dates/timeframe are you looking at?
    – 0xFEE1DEAD
    Dec 30, 2022 at 16:03
  • By replacing TLT with IEF, you're significantly altering your question...
    – 0xFEE1DEAD
    Jan 1, 2023 at 22:52

1 Answer 1

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It would really help if you clarified your question. As asked, it's difficult to answer without knowing what time frame you're referring to.

First off, SHY holds Treasuries with maturities between one and three years, whereas TLT holds maturities of 20 years and over. Based on that, the 10Y-2Y spread might not be the most relevant part of the curve for your question.

Second, duration is the sensitivity to rate changes. Volatility is a related but separate concept.

SHY is mostly driven by Fed policy in the near term (FOMC intervention and guidance) whereas TLT is driven by the longer-term economic outlook (GDP growth/recession, inflation/real rates, etc.)


Treasury ETFs might be a good proxy for rates but the correlation isn't perfect. Due to the large number of holdings and supply/demand dynamics, there's no straightforward way to explain it. There might be days where one ETF sells off more than the other. Rather than focusing solely on the depth of the inversion, I'd also consider the rate change and absolute level at each point of the curve.

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  • @KaguyaŌtsutsuki again, on which dates are you observing the disconnect? Also, why would you expect a perfect correlation? Treasury ETFs aren't bond futures.
    – 0xFEE1DEAD
    Jan 1, 2023 at 22:47

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