TLT Draws Fresh Cash Even as Treasury Yields Drop

The recent move lower in long-term interest rates isn’t discouraging investors from putting money to work in the hugely popular iShares 20+ Year Treasury Bond ETF (TLT). 

Since the 30-year Treasury bond yield peaked at around 5.1% at the end of October, investors have added $2.5 billion to TLT, including more than $700 million on Nov. 28. 

Yields on the 30-year Treasury bond have fallen significantly over the past month, from 5.1% to 4.4% on Friday, fueling an 11% rally in TLT. 

Arguably, buyers of TLT today are getting a worse deal than those who bought at the end of October, but with inflation trending lower and talk of a soft landing picking up, some might be comfortable adding to long bonds even after November’s rally.  

That might not be the case for other investors, who could argue that the 70 basis points drop in the 30-year yield makes TLT too risky now

TLT's Risk  

If yields on long bonds jump back up toward 5%, TLT could quickly give up in price what it’s gained over the past month, as prices have an inverse relationship with yields. 

And even if the peak in rates is in, how much downside is there from current levels? Fed-funds futures have aggressively been pricing in rate cuts for 2024 in recent weeks, but even they are suggesting only that the Federal Reserve's benchmark rate will get down to around 4% by the end of next year. 

If that’s the case, then it might be difficult for the yield on the 30-year to fall significantly below that level anytime soon.  

On the other hand, longer-term projections of the fed-funds rate—like those based on the Fed’s Summary of Economic Projections— suggest that the “neutral rate” for the fed’s benchmark is 2.5%.

Based on a term premium of 50 to 100 basis points, that translates into a yield of 3% to 3.5% for the 30-year Treasury—solidly below the levels of today.