TLT: Are Rates Too High, Too Low, or Just Right?

Is now the time to buy TLT?

The iShares 20+ Treasury Bond ETF (TLT) fell to a new low earlier this month after the January consumer price index data rose a hotter-than-anticipated 0.3% and the producer price index also failed to meet expectations. 

TLT, which is a highly liquid U.S. government long bond product, was recently trading just above $93, near the bottom of its 2024 trading range this year. TLT swooped as high as $109.35 in 2023 before dipping later in the year amid rising investor optimism about inflation, potential U.S. central bank interest rate cuts and the economy, 

But with inflation’s latest jump and the Fed’s hoped-for, dovish turn on hold, buying TLT on dips over the coming months could be an optimal approach to the product that tracks long-term U.S. interest rates and has about $50 billion in assets under management. TLT trades an average of more than 45 million shares daily and charges a 0.15% management fee. 

Let’s consider the key issues. 

Fed Rate Cut Signals

Inflation measured by the CPI, PPI, and PCE indices moved lower over the past months, causing bonds and TLT to rally from the October 2023 sixteen-year low. The U.S. central bank paused rate hikes over the past months as inflationary pressures receded, but although they have not lowered rates yet, they are likely to later in the year. Meanwhile, the January jump in CPI and PPI have caused long bond futures and TLT to move to marginal new 2024 lows—potential buying opportunities.

Flight to Quality 

While inflation is a critical factor for the path of least resistance of U.S. rates over the coming months, geopolitics will also determine trends as the U.S. remains the world’s leading economy. The ongoing war in Ukraine and the potential for an escalating conflict in the Middle East could cause sudden flight-to-quality action in markets. Investors and traders worldwide consider U.S. bonds and the U.S. dollar safe havens in tumultuous times. Hostilities could lead to sudden sharp rallies if worldwide hostilities increase or spread to other regions.

2024 U.S. Presidential Election

 The uncertainty of the US. Presidential election and other issues could pull bond prices in opposite directions over the coming months, with the Fed striving to remain apolitical. While growing U.S. debt at over $34 trillion could put pressure on the U.S. credit rating and push bonds lower, the election and global unrest could also increase the safety profile of U.S. government debt. Bullish and bearish factors pulling bonds in opposite directions could limit any significant price moves outside the 2023 range.

Attractive Returns Will Drive Capital Into Government Bonds  

The latest CPI data poured cold water over the recent stock market rally. As stocks falter, U.S. government debt securities with guaranteed rates become more attractive investment vehicles. Rates are far higher than over the past years, causing some investors to shift capital from equities to fixed-income assets.  

Higher rates have caused capital to flow into TLT in early 2024.

To be sure, the inflationary spiral is likely over. But the Fed’s 2% target remains challenging. Rates are therefore likely to remain in a narrow range over the coming months. The recent move to a new low for 2024 could be a buying opportunity as capital flows toward fixed-income assets offer attractive yields.