iShares 3-7 Year Treasury Bond ETF

IEI

Market cap $17B

Treasuries resilient: Medium-term US bonds, via IEI ETF, show limited price impact despite government shutdowns and ongoing fiscal deficits. The IEI ETF offers no-thrills returns in times when the economy is transitioning. Despite the rise in term-premium last year, it has stabilized and has not risen further, even in the midst of political woes, the rising US budget deficit, and the trade war.

The bond market looks increasingly focused on slowing economic growth vs. tariff inflation.

IEI offers mid-duration Treasury exposure with low credit risk, but its expense ratio is higher than a combination or single alternatives depending on the desired accuracy of duration matching. Current inflation and duration risks are muted, with the main concern around potential USD weakness from fiscal deficits. Market consensus and recent data suggest stable leading inflation indicators and job markets, reducing the urgency for policy accommodation or fear of aggressive disinflation.

In recent days, a new headwind is weighing on fixed income securities: a US government budget bill, which is expected to significantly raise an already hefty federal deficit in the years ahead. Long-term Treasuries are the biggest losers post-Liberation Day, based on a set of ETFs through yesterday's close (May 21).

A riskier part of the bond market is offering yields around 8%, according to a BlackRock strategist

The iShares 3-7 Year Treasury Bond ETF is sensitive to yield curve changes, making it risky amid rising inflation expectations and disappointments regarding rate cuts. IEI's irregular maturity profile increases costs unnecessarily; cheaper alternatives with similar duration exposures exist, making IEI specifically uninteresting. The bond market's optimism on rate reductions may be misplaced, as rising inflation expectations and partial oil price recovery could force the Fed to prioritize inflation control.

IEI targets intermediate-term U.S. Treasuries but introduces unnecessary interest rate risk with a 4.26-year duration. Historical performance shows IEI's sensitivity to Fed actions, with significant price moves during crises and periods of uncertainty. Current risks outweigh the prospects; sticky inflation and a slower pace of cuts make IEI less attractive.

Core inflation remains high, and if oil prices don't stay down, the headline and core readings should converge. With growth not a concern yet given the data, the Fed has less reason to cut rates, despite the comments of committee members. It doesn't help that there is upside for oil due to supply risks related to Iran-Israel escalation risks. This could reverse some of the CPI cooling we've seen precluding rates.

This week's ETF Wrap shines the light on bond-fund performance as investors on Thursday weighed fresh inflation and jobless-claims data.

The ECB cut rates by 25bp as widely anticipated, but a slightly hawkish tilt bear flattened the EUR curve, which in our view remains priced aggressively. In the US, as the markets head towards the Fed's first rate cut, the probability of a larger cut rose slightly on Thursday.