The Paradox of TLT’s Record Inflows and Nosedive Performance

There’s nothing especially unique about assets flooding into certain funds or strategies, unless the fund is sinking in that flood like a rock. 

Behold, the extraordinary appeal of the iShares 20+ Year Treasury Bond ETF (TLT), which has attracted $17.2 billion in net flows this year, ranking third among all ETFs through the third quarter. 

TLT, a $38.9 billion fund that tracks a market-weighted index of U.S. Treasury bonds with maturities of 20 years or more, is down 12.6% from the start of the year. Yet the flows keep coming, including $1.4 billion last week. 

In Wall Street parlance, this illustrates the phenomenon of catching a falling knife. 

“People have been trying to call a top on yields all year, and as the Fed has been able to avert a hard landing, it’s taken investors by surprise,” said Christian Salomone, chief investment officer at Ballast Private Wealth. 

To put the net flows into perspective, TLT trails only the $323 billion Vanguard 500 Index Fund ETF (VOO), which has taken in $29.9 billion, and the $341 billion iShares Core S&P 500 ETF (IVV), which has taken in $17.8.6 billion. 

Both VOO and IVV are up 12.0% and 11.5% respectively this year.

Theories on TLT 

While most analysts agree the TLT flows are too big for retail investors alone to drive them, several theories may explain what is drawing institutions and professional investors into the ETF. 

Salomone believes a key driver is a “kink in the 20-year part of the yield curve” that has it yielding slightly more than the 10-year and 30-year Treasuries.  

As Salomone explains it, if the economy starts to dip toward recession and the bond market moves ahead of the Federal Reserve in cutting interest rates, a rush to quality by investors will give the 20-year Treasury a slight boost over the 10- and 30-year long bonds. 

“People are buying TLT with the expectation that at some point, rates will stop rising,” he said. “But as the Fed has been able to avert a hard landing, it’s taken investors by surprise.” 

Matt Freund, head of fixed-income strategies at Calamos Investments, also sees the TLT flows as a “flight to quality by some investors.” 

He added: “More likely, investors are positioning for a relief rally as long-term yields have moved higher at an unprecedented pace. A pullback is overdue, especially if the economic data softens in the weeks and months ahead.” 

A Recession Hedge?

Tom Graff, head of investments at Facet, said TLT is benefiting from the theory that it will serve as a recession hedge, which he doesn’t think will work as it has in the past.  

“The last couple recessions the Fed cut rates close to zero, but I don’t think that’s going to happen this time,” he said. 

Bond prices move in the opposite direction of yields, but Graff thinks there’s a chance yields on longer-term bonds might not budge if the Fed doesn’t have to aggressively cut rates. 

“I understand the reason to use TLT as a hedge, I just don’t think it’s a good idea right now,” he said. 

BlackRock's Take

Even BlackRock, the issuer of TLT, acknowledged the “counterintuitive” nature of the flows. 

Stephen Laipply, managing director and global co-head of iShares Fixed Income ETFs at BlackRock, pointed to model portfolios at large brokerages and advisory firms among the drivers of TLT’s flows. 

“If you’re building out one of these portfolios, you don’t want to see rates moving higher, but the purpose is not to try to time the market,” he said. “It speaks to the overall long-term view of asset allocation. I’m quite certain for folks who entered [TLT] earlier in the year would probably rather see it up.” 

Beyond the model portfolios pre-programed to rebalance into TLT, Laipply said there are “multiple use cases for TLT.” 

“If there’s a risk-off event or recession, you’ll see the back end of the yield curve come down,” he said. “The back end could start sniffing this out before policy makers start making their moves.” 

Meanwhile, Paul Schatz, president of Heritage Capital, is now watching the direction of TLT inflows to determine the ETF’s potential bottom. 

“The inflows suggest people are buying the decline on the way down,” he said. “Given that people have bought the whole way down, you’d think in order for TLT to bottom you’d need the inflows to stop, and normally you’ll see these bond proxies rally long before there are rate cuts.” 

Contact Jeff Benjamin at [email protected] and find him on X: @BenjiWriter