How TLT Can Return to the Spotlight in 2024

Rate cuts still likely “at some point” in 2024, as commercial real estate risks loom.

kent
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Research Lead
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Reviewed by: etf.com Staff
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Edited by: James Rubin

TLT is down but don’t count it out for 2024.  

Investors expecting falling yields and higher bond prices this year received relief Wednesday as U.S. Fed Chair Jerome Powell’s testimony before Congress affirmed the central bank’s expectation that rate cuts will come “at some point” in 2024. 

The iShares 20+ Year Treasury Bond ETF (TLT) was up 0.50% on Wednesday’s news, adding to Tuesday’s 1.4% gain.  

The bond market proxy was a star in 2023, capturing much of the year’s financial media spotlight as investors poured $24 billion into the fund, despite falling bond prices, making TLT one of the year’s fastest-growing funds. 

The long-awaited bottom of the historic bear market for bonds came in October, and TLT’s price subsequently climbed more than 20% as investors bet that the worst of inflation was over. Meanwhile, the Fed’s infamous “dot plot,” where individual board members jot down where they see rate policy headed, revealed expectations for 75 basis points of rate cuts in 2024. 

Powell’s affirmation of those expectations on Wednesday helped to neutralize hotter-than-expected inflation reports in recent months. 

The bond market now forecasts a 95% probability that the Fed will not raise rates at this month’s FOMC meeting, pushing the next best chance of a rate cut to July, which now stands at a 90% probability.

Where is TLT's price heading now?

TLT Outflows and Higher for Longer Concerns

From Jan. 1 through March 6, TLT outflows were $315 million, raising fresh concerns of a “higher-for-longer" environment for interest rates that would spell bad news for bond prices. The market’s obsessive monitoring of the Federal Reserve’s rate policy and how it may affect Treasury yields and rate-sensitive stocks highlights the fickleness of short-term traders and investors, as well as the apparent flimsiness in their planning. 

A significant challenge for investors and advisors who closely observe economic news and capital markets is that short-term noise can be difficult to filter out of the investment process. TLT is a prime example of this issue as traders and investors seeking quick gains in 2023 appeared to use the bond market proxy as a tool to bet on a soft landing in 2024, while failing to plan for bumps along the path to get there. 

TLT Price Prediction for 2024

While it’s nearly impossible to accurately predict the short-term price movements of any investment security, it’s not difficult to forecast where prices will likely go in the long run, if you know where to look for supporting data. Two prime examples that can aid in a TLT price prediction for 2024 are both related to real estate—the eventual decline of shelter cost inflation and the extreme weakness of commercial real estate. 

Shelter Cost Inflation Expected to Fall

When the Fed announced in December its dot plot projection of three 25-basis point rate cuts in 2024, many board members likely had falling shelter cost inflation in mind. The cost of housing—or what economists call shelter costs—represent about one-third of the basket of goods and services in the Consumer Price Index (CPI) and about 18% of the Personal Consumption Expenditures (PCE) report, the Fed’s preferred inflation gauge. 

Shelter costs, particularly rents, generally have the longest lag associated with changes in interest rates, which is why they’ve yet to aid in bringing down overall inflation. For example, the Bureau of Labor Statistics (BLS) tracks rents for all tenants, not just those starting new leases. Thus, people staying put for a year or more might not see their costs change as rapidly, as rental leases are typically six months to a year. 

Consistent with the lag effect, a 2023 report from the Federal Reserve forecast that shelter cost inflation had a strong likelihood of falling to zero by May 2024. This is not to say that shelter costs are expected to fall, but that the rise in prices is expected to be lower (falling inflation means a slower rise in prices, or disinflationary, whereas falling prices is deflation).

Thus, for example, 1% shelter cost inflation is much lower than 8%, where it stood early in 2023. Given this outcome, and barring surprises from other pieces of the inflation basket, overall inflation would be much closer to the Fed’s preferred 2%, thus justifying rate cuts by the second half of 2024. 

Commercial Real Estate Weakness

The 2023 regional banking crisis highlighted the interconnectedness of the financial system and the potential vulnerabilities of regional institutions during periods of economic tightening. The risk of a similar crisis still looms while interest rates remain high. 

Rising interest rates, a key tool used by the Federal Reserve to combat inflation, squeezed profit margins for banks in early 2023, spurring a regional banking crisis. Additionally, weakness in the commercial real estate market, a significant asset class for many regional banks, led to loan defaults and increased risk exposure. This perfect storm of economic pressures ultimately triggered a wave of bank failures in 2023. 

As cited in a recent 60 Minutes report, commercial real estate occupancy rates remain dangerously high in 2024, as work-from-home trends have become a new normal, sending office occupancy rates to all-time lows. Meanwhile, interest rates remain at historic highs as $1.5 trillion in commercial real estate loans expire in the next two years. Thus, the conditions that combined for the 2023's regional banking perfect storm are still present today. 

All this adds up to reasoning for rate cuts later in 2024, and potentially more than the 75 basis points currently priced into bonds, thus leading to significant price gains for TLT, as bond prices have an inverse relationship with rates. Technical traders seeing commercial real estate as an existential threat to the U.S. economy see TLT’s price headed as high as 120 in 2024, as the Fed's hand is forced to lower rates more than 75 basis points to avert contagion.

Bottom Line on Buying and Holding TLT

Investors holding TLT now likely consist of those expecting rates to fall by at least 75 basis points, but probably more, in 2024. They’re not considering just one or two CPI or PCE reports for guidance, but rather the broader picture of long-term disinflationary trends. They understand that monetary policy changes have a lag effect on the economy, meaning that today’s TLT investors see slowing economic activity, or worse, in 2024 and thus, that a less restrictive rate policy and rising bond prices are coming.

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.