TLT vs. Short Sellers

All eyes are on the bond market, and for good reason. 

This week’s news that the 10-year Treasury yield hit 4.8%, its highest level since 2007, sent investors scrambling for the exits on a wide range of ETF positions, most notably the iShares 20+ Year Treasury ETF (TLT), which has become a proxy for long-term bond ETFs. 

Dividend ETFs also took a hit this week as higher bond yields create strong competition for dividend-paying stocks. 

Rising bond yields have been a problem for bond prices—yield and price have an inverse relationship—and high dividend ETFs for most of 2023. The Vanguard High Dividend Yield ETF (VYM) is down 6.5% this year, while the broader market, as measured by the SPDR S&P 500 ETF Trust (SPY), is up more than 11%. 

This story is likely to play out for some time, as investors continue to watch Treasury yields and the economic data that drives them. 

For example, if this Friday’s non-farm payrolls report comes in weaker than expected, or if next week’s September CPI comes in below consensus, yields could fall which would provide relief to stock and bond investors. But the opposite would compound the higher yield problem, sending stock and bond prices lower. 

TLT Inflows vs. Higher Yields and Falling Prices 

A related story that has many market observers scratching their heads is TLT inflows have significantly risen in 2023, even as prices have fallen. Since long-term bonds have greater price sensitivity to interest rates, some investors like to use TLT and other long bond ETFs as a hedge against recession. In this environment, inflation, rates and yields are falling, while longer duration bonds would rise more in price compared to shorter duration bonds. 

Thus, the increase in assets for TLT in 2023 is not surprising as many analysts and economists expected a recession to begin by the end of the year. But TLT investors have been disappointed as recession is now nowhere in sight, the “higher for longer” inflation and interest rate fears are growing, and prices for TLT continue to fall.  

TLT vs. Short Sellers 

Contrary to TLT buyers, some traders are betting that inflation will remain sticky, which will lift bond yields higher and place more downside pressure on long bond ETFs. This bearish sentiment is evident in TLT short interest, which was recently at its highest level since January 2022. Perhaps the most notorious long bond short seller in 2023 is Bill Ackman, the hedge fund manager and founder of Pershing Square Capital Management, who shorted the 30-year Treasury bond.  

Short interest in long bonds could partially explain the fall in long bond ETF prices. For example, short selling involves borrowing a security whose price the trader expects to fall. If the price falls, the short seller gets to buy the security at a lower price, profiting from the trade. If many traders do this, there will be many sell orders which will push the price of the security down. Then, the trend may be reinforced when other traders see the price decrease and also sell their positions.  

This short-term selling trend can be considered self-fulfilling because it helps to create an environment that it was built upon, but over the long run, short selling does not drive the price trend.  

What’s Next for TLT and the Long Bond ETF Market? 

The price for TLT is down 15% this year and it’s declined 50% from its August 2020 high and is now at its August 2007 price level, just before the onset of the Great Financial Crisis. When will TLT reverse course? History says that a surprise in economic data, such as cooler than expected inflation numbers, inspires buying of long-term bond ETFs, especially following an oversold market. 

Eventually, TLT buyers will get what they’ve been looking for and yields will come back down while prices come back up. Until then, long bond short sellers will continue to win.