TLT vs. Worst Treasury Bonds Bear Market in History

Treasury bond ETFs jumped higher after hitting a 16-year low last week. 

The iShares 20+ Year Treasury Bond ETF (TLT), which has become a proxy for the long-term Treasury bond market, reached its lowest price since 2007 on Friday. From that low point through midday Wednesday, TLT bounced back up nearly 5% in price. 

Coinciding with Friday’s multiyear low for TLT, Bank of America Global Research noted that the peak-to-trough loss in the U.S. 30-year yield hit 50% and that the three-year steep decline marks the “greatest bond bear market of all time.” 

Why Is the TLT ETF Rising in Price? 

With all the bad news about bonds, why are TLT and other long-term bond ETFs bouncing higher? The short and simple answer is that investors are buying TLT for a range of reasons, including contrarian bets that a bottom in price is near, higher yields and expectations of a normalizing yield curve. 

Because bond yields move in the opposite direction of bond prices, investors and advisors can use long-term Treasury bond ETFs like TLT as a means of capturing significant price appreciation once inflation and interest rates level off and reverse course. 

Thursday’s Consumer Price Index reading will likely add more excitement to the once boring bond market. 

TLT, Contrarians, the Fed and the Recession Hedge Bet 

2023 has been a year full of similar perplexing news, including the paradox of record inflows for TLT while performance was nosediving. Bill Gross, a co-founder of Pacific Investment Management Co., or Pimco, an investor known as the “Bond King,” has also weighed in blaming retail ETF investors for the bond market selloff.  

A more likely explanation for perplexing bond market volatility is that investors who are nervous about falling prices are bailing out, while others are buying shares for multiple reasons, including contrarianism, yields, Fed talk and recession hedging. 

Here’s a breakdown of potential reasons TLT is rising after hitting a 16-year low: 

• TLT oversold: Investor panic over the Fed's willingness to keep rates higher for longer has resulted in heavy selling, which may now be overdone from a technical standpoint, as traders are coming in to buy at depressed prices from a potentially oversold long bond market. 
• Contrarian investing: This strategy involves buying or selling securities in contrast to the prevailing sentiment of the time. It’s difficult to imagine more negative news than last week’s talk about the worst bear market for bonds in 247 years, as the U.S. first issued sovereign Treasury bonds to finance the American Revolutionary War. Thus, with such negative sentiment around Treasury bonds, a contrarian investor might choose to buy shares of TLT or other long-bond ETFs.
• Higher yields: With yields on the 20-year Treasury crossing the 5.0% threshold this week, some investors don’t mind getting paid by way of interest while waiting for price appreciation that will eventually come when the economy finally slows down. 
• Fed talk: In the past week, two Federal Reserve officials, including Minneapolis Fed President Neel Kashkari and Atlanta Fed President Raphael Bostic, have signaled that more rate hikes may not be necessary, further supporting the soft-landing narrative. 
• Recession hedge: Should the U.S. enter a recession in 2024, yields would presumably come down, sending prices higher, especially for long-term bonds, because they are more interest-rate sensitive than bonds of shorter maturities. That makes long-term bond ETFs like TLT a popular tool for investors and advisors to use as a recession hedge. 

Investors will continue to watch for clues about the direction of inflation and interest rates through economic data, especially the CPI and PCE reports. This data will surely produce more volatility in the long bond market. Adding complexity to the fixed income outlook is the Israel-Hamas war, which has some investors fleeing to the relative safety of short-term bond ETFs, as well as gold.