--- title: "Want to bet on the bond rally? Check out these overlooked funds." type: "News" locale: "en" url: "https://longbridge.com/en/news/296387794.md" description: "The U.S. Treasury's announcement to refinance long-term debt via short-term borrowing sparked a bond rally, prompting advice on overlooked closed-end funds and ETFs like BlackRock's BHK and Vanguard's EDV. Experts note the move is largely symbolic with minimal impact on the $32 trillion debt, as it involves borrowing rather than quantitative easing or debt reduction." datetime: "2026-08-19T18:04:00.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/296387794.md) - [en](https://longbridge.com/en/news/296387794.md) - [zh-HK](https://longbridge.com/zh-HK/news/296387794.md) generator: "portal-rs" --- # Want to bet on the bond rally? Check out these overlooked funds. By Brett Arends The Treasury just sparked a bond-market rally. Here is why it may not last. The U.S. Treasury, headed by Scott Bessent, is going to pay off government IOUs with borrowed money. Wall Street is cheering. If you really want to jump on this bond rally with a bold bet, take a look at some of the closed-end mutual funds that invest in fixed income. But bear in mind that Wednesday's rally, sparked by news from the U.S. Treasury, may not be all that it seems. More on that in a moment. John Cole Scott, president of closed-end specialists CEF Advisors, highlights three such funds - all, as it happens, managed by BlackRock (BLK): Core Bond Trust BHK, a multisector bond fund; Taxable Municipal Bond Trust BBN, which as its name suggests invests in municipal bonds that are subject to federal tax; and MuniHoldings Fund MHD, which invests in muni bonds that aren't. All three invest mostly in longer-term bonds, which are rallying the most, and use leverage, meaning they borrow extra money at short-term rates to buy bonds - something that works so long as short-term rates are lower than long-term ones. Ryan Paylor, senior portfolio manager with veteran closed-end bond specialists Thomas J. Herzfeld Advisors, highlights four closed-ends that invest in municipal bonds free from federal tax. Federated Hermes Premier Municipal Income FMN and Aberdeen Municipal Income MFM invest in municipal bonds across the country. Pimco New York Municipal Income II PNI and Pimco California Municipal Income PCQ focus on those two states, respectively, avoiding state income taxes. All four invest mostly in longer-term bonds, Paylor notes. All have hefty leverage, which can make them volatile. Crucially, all four also sell for 90 to 92 cents per dollar of assets. Closed-end funds are mutual funds that resemble stocks: They issue a fixed number of shares, and these trade on the stock market. Among their features is that, because the share price is driven by short-term market moves, the shares can sometimes sell for less than the underlying value of the investments. If you want to bet on longer-term Treasury bonds, you also have low-cost ETF options - including Vanguard Extended Duration EDV, which invests in zero-coupon Treasury bonds maturing in 20 to 30 years; PIMCO 25+ Year Zero Coupon U.S. Treasury Index ZROZ, which invests in even equivalents that are even longer term; and the lower-risk Pimco 15+ Year U.S. TIPS Index LTPZ, which invests only in inflation-protected Treasury bonds known as TIPS. All of them jumped sharply Wednesday morning following the surprise announcement from the U.S. Treasury that it will raise the rate at which it buys back long-term Treasury bonds for the next few months. Bonds are like seesaws: When the price rises, the interest rate falls, and vice versa. The news came just one day after the latest BofA Securities monthly survey of fund managers showed that big institutions were heavily underinvested in bonds. This helps explain why the market reaction was so sharp. Bond expert Mike Lorizio, head of U.S. rates and mortgage trading at investment giant John Hancock, says that, on balance, the news is positive for long-term bonds. It means more of them will be bought by an investor - the Treasury, which ultimately means the U.S. taxpayer - who isn't sensitive to price or yield. It will improve trading liquidity among longer-term bonds and will see their prices higher, and yields lower, than they would be otherwise. But Lorizio also says the announcement is largely "symbolic," showing that the Treasury was aware of the spreading alarm at rising long-term interest rates. And he says the amounts involved are pretty small. While the Treasury says it will increase the size of each buyback from $2 billion to "at least" $4 billion, official government figures show that the total amount of Treasury bonds and bills in circulation right now is $32 trillion - which is 8,000 times $4 billion. Most critically, Lorizio points out, this news from the Treasury is not a return to "quantitative easing," where the Fed prints new money and uses it to buy bonds. The Treasury is not conducting these buybacks to reduce the size of the national debt. Instead, it will merely borrow more money, at short-term interest rates, by issuing extra Treasury bills and notes, and then use the money to cut its borrowings at long-term rates, by repurchasing bonds with maturities of more than 10 years. Not cutting the debt? Actually, the U.S. government continues to grow its debt at an extraordinary pace. The budget model run by the president's own alma mater, the University of Pennsylvania, calculates that the federal government has increased the national debt by another $1.3 trillion since January, not even counting the extra borrowings from the Social Security trust fund. A growing percentage is already borrowed at short-term rates. Long-term bond yields have been rising around the world, not just in the U.S., and it isn't really about "liquidity" in the long-term bond market. It's about soaring national debts, coupled with a refusal to admit that there is any limit to the amount that can be borrowed. Japan, with the highest gross debt in relation to the size of its economy, is now there. Viewed in that light, the news from the Treasury, despite the inclusion of the magic word "buyback," is really just another case of robbing Peter to pay Paul, or trying to reduce your debts by moving some of your IOUs from your left pocket to your right pocket. The best that can be said is that it may reduce the term risk of the bond market by making the debt shorter term. Your correspondent, just to share my two cents, has been arguing that longer-term inflation-protected Treasury bonds have looked pretty cheap for some time. They still do, despite Wednesday's bounce. But this is just an opinion, and longer-term bonds also involve plenty of price volatility. You could reasonably ask if the U.S. government will put its fiscal house in order before it is forced to - by a full-blown debt panic in the Treasury bond market. In other words, long-term TIPS paying 3% above inflation may prove good value if you hold them until they mature, but it is always possible that they will have to hit 4%, or even 5% temporarily, before the politicians, and the people who own them, realize there are worse things than taxes. Not fixing a problem until a disaster forces you to is known in the airline industry as "tombstone regulation": They don't change the regulations, and fix a known problem, until planes crash and people die. Penn's budget quants estimate that at the current trajectory, the U.S. national debt will become unsustainable in about 20 years. They say that there is a 25% chance - yikes-that it will hit that point inside 14 years. But, they add, that doesn't mean we have that long to do something, because bond investors - if not voters and politicians - can do math, and they will presumably start to panic long before D-Day. -Brett Arends This content was created by MarketWatch, which is operated by Dow Jones & Co. 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