TLT Investors Double Down on Flight-to-Quality Wager
The bet is that the yield curve on U.S. Treasuries will "normalize," one market observer says.
The paradox of the $37.5 billion iShares 20+ Year Treasury Bond ETF (TLT) is shaping up to be the ultimate example of investor optimism paired with opportunism.
The exchange-traded fund, which tracks a market-weighted index of U.S. Treasury bonds with maturities of 20 years or more, has soaked up nearly $17 billion worth of net inflows since the start of the year, despite a 12.7% decline.
Even Stephen Laipply, BlackRock’s global co-head of iShares fixed-income ETFs, describes the pattern as “counterintuitive,” adding that some of the flows can be attributed to rebalancing in model portfolios.
But Christian Salomone, chief investment officer at Ballast Rock Private Wealth, says there is a lot going on behind the scenes of this ETF that has evolved into a proxy for long-term Treasury bonds.
Jeff Benjamin: What’s going on with TLT?
Christian Salomone: There’s a kink in the yield curve that has the 20-year Treasury yielding 31 basis points above the 10-year and 19 basis points above the 30-year.
JB: That kink is a separate issue from the inverted yield curve, but why is that happening to yields at the long end?
CS: It has to do with supply and demand. There aren’t as many natural buyers of 20-year Treasury bonds.
JB: What do you mean by “natural buyer”?
CS: The 10-year is the most liquid part of the yield curve and is very popular. The 30-year is the longest part of the curve and is attractive to fund managers with long-term liabilities like pension funds and insurance companies.
JB: How long as this kink been in place?
CS: We first saw it appear at the end of 2021, and by the second quarter of 2022, we saw the yield separation increase to the current levels.
JB: What is the strategy behind loading up on the 20-year through TLT?
CS: Investors are trying to take advantage of the kink by buying the 20-year and getting the artificial bump in yields. There are probably a lot of hedge funds and people who are trying to be opportunistic.
JB: So, investors are buying TLT in anticipation of more normalized yields on the long end?
CS: Correct. It’s a bet on the yield curve normalizing, because when the trade normalizes, TLT will increase in value.
JB: Is it a wise strategy to keep buying TLT all the way down?
CS: Potentially, buyers might also be short other parts of the curve against TLT. Obviously, everyone has been wrong so far. But at some point, you would expect long-term yields to go down. At least that’s the hope of people buying TLT.
JB: What will it take for yields on long bonds to normalize?
CS: If there’s a flight to quality and people just want to own U.S. Treasuries, and the more money that goes into Treasuries the better chance there is of normalizing the curve. But my guess is, it will take something much more global than the war in Israel to straighten out the kink. It would need to be something that frightens people about the global economy.
Contact Jeff Benjamin at [email protected] and find him on X: @BenjiWriter
