TLT Demand Surges Before Expected Fed Rate Cuts

ETF investors love long bonds again. After a slow start to the year, inflows for the iShares 20+ Year Treasury Bond ETF (TLT) have skyrocketed over the past couple of months.

Year-to-date inflows for TLT total more than $8 billion, up from only $420 million at the end of May.

The strong demand for the ETF over the past couple of months means that 2024 will likely end up being yet another stellar year for TLT inflows, following annual inflows of $15.7 billion in 2022 and $24.5 in 2023.

Investors have been pouring money into the ETF as it becomes increasingly likely that the Federal Reserve will cut interest rates in September. 

TLT, which holds a basket of Treasury bonds with maturities of more than 20 years, is influenced by changes in the Fed-controlled federal funds rate. As rates go down, prices for the bonds in its portfolio tend to go up.

TLT Yield Less Sensitive to Fed Funds Rate

However, as an ETF tied to bonds that are far from maturity, TLT’s yield is less sensitive to changes in the fed funds rate—an extremely short-term interest rate—than ETFs which hold shorter-term bonds. 

For instance, the yield on the 2-year Treasury is currently down 100 basis points from its high of 2024, the yield on the 10-year is down by 75 basis points, and the yield on the 30-year is down by just under 60 basis points.

On the other hand, TLT’s price is more sensitive to changes in yield than ETFs which hold shorter-term bonds.

That gives investors more bang for the buck when interest rates go down—usually. For instance, since the high point in yields on April 25, TLT is up by 11%, compared to a gain of 5% and 3%, respectively, for the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 1-3 Year Treasury Bond ETF (SHY).

Thus, while the yield on long bonds have gone down less than yields on shorter term bonds, it’s been more than made up for by the former’s sensitivity to interest rates, otherwise known as duration.

TLT Price Rises With Falling Yields

This interest rate sensitivity works in favor of investors when yields are falling, but it has the opposite effect when yields are rising.

At its low point of the year—when yields were at their highs—TLT was down more than 10%, much more than the 3.5% loss for IEF and the 0.2% loss for SHY.

Interestingly, it’s around the time of the ETF’s price low that dollars began flowing into TLT. In the period between the start of the year and the end of April, investors had taken a net $680 million out of the ETF.

But those outflows quickly turned into inflows in May and beyond.

A shift in the inflation narrative was the catalyst for the inflows and TLT’s improved price performance. A series of high inflation readings during the early part of the year caused investors to worry that interest rates would remain much higher than expected, but as consumer prices began to cool during the summer months, rate expectations began to fall.