Long Bond Fund Ranks as 2023’s Most Popular ETF

Exchange-traded fund investors are placing big bets on long bonds, hoping for a bounce-back.  

The iShares 20 Plus Year Treasury Bond ETF (TLT) is the No. 1 asset gatherer among U.S.-listed ETFs this year, with inflows of $10.8 billion. 

Investors in TLT have been betting on a rebound in Treasury bond prices after they had their worst year in modern history in 2022. 

So far, they’ve been right. The $38 billion ETF is up 4.9% this year after having fallen by 31.2% last year. 

Prices for Treasury bonds, which move inversely to yields, have bounced back as the Federal Reserve has signaled it may pause interest rate hikes starting this month. 

That would put at least a temporary end to the U.S. central bank’s rate hiking campaign that began in March 2022 and saw the Fed raise rates a whopping 500 basis points over 14 months. 

Markets are now anticipating the Fed may cut interest rates as soon as this year—something that would provide support to Treasury bonds and especially long bonds, which are some of the most interest-rate-sensitive bonds.  

TLT has a weighted-average maturity of 25.52 years and an effective duration of 17.45 years, meaning the price of the fund will rise or fall roughly 17.5% given a 1% change in interest rates. 
 
For context, the effective duration for the iShares Core U.S. Aggregate Bond ETF (AGG) is 6.3 years.  

Unlike some other forms of U.S. federal government debt with shorter maturities, near-term returns for long bonds are heavily influenced by price movements rather than just yield.  

The total return for the iShares 0-3 Month Treasury Bond ETF (SGOV) will almost exclusively come from its yield, while the total return for TLT—at least in the short term—will come from a combination of yield and price movements, with the latter overwhelming the former at times in which interest rates move significantly.  

Given that dynamic, some investors may be piling into TLT thinking that interest rates on the 30-year Treasury bond are going to fall from the current 3.85% level.  

They may very well be right, especially if interest rates revert to the lower levels they were at prior to the inflation surge of 2021 and 2022.  

But there is still risk involved. With the 30-year yield currently trading more than 115 basis points below the federal funds rate, at least some interest rate cuts have already been priced into long bonds. 

And if the Fed keeps rates at current levels for longer than anticipated, that could put upward pressure on the 30-year bond yield (and downward pressure on prices for TLT). 

In other words, investors in TLT are counting on the Fed to make substantial rate cuts.  

Contact Sumit Roy at [email protected]