Is TLT the 'Money Incineration Machine' Some Say It Is?

In the context of an economy fixated on the elevated level of interest rates, macroeconomic strategist Jim Bianco is suggesting there are large swaths of the market that are missing the point. 

Speaking Monday morning in Chicago at the National Association of Active Investment Managers conference the president of Bianco Research said investors are overlooking the period between 2010 and 2020 when “rates were too low.” 

“People see mortgage rates at a 23-year high and therefore assume they’re too high,” he said. “But it’s only high if you anchored yourself to the decade up to 2020 that was manipulated by quantitative easing.” 

Bianco refers to that period as a “distortion and anomaly.” 

“Interest rates are returning to the level they should be in a post-QE period,” he said. 

TLT Investors Called Out

Bianco cited the wildly popular iShares 20+ Year Treasury Bond ETF (TLT) as an example of how investors are overlooking some realities in the bond markets. 

The $39.7 billion TLT has taken in $20.5 billion worth of net flows this year, despite a 14% decline in share price over the same period. 

“TLT has been a perfectly designed money incineration machine because people are so sure bonds will rally,” he said. “They are so sure rates will fall because they forgot the past decade for rates was a distortion.” 

As Bianco sees it, the Federal Reserve has been trying to let the market do the job of the Fed, but market watchers and forecasters are having a hard time keeping up. 

Citing the rolling waves of recession predictions, he described it as a pattern of “the economy will suck in six months, so be long bonds.” 

“The recession will continue to be six months away; it will never be now and you have another reason to own bonds,” he added.

Bianco said what investors are missing, especially those loading up on TLT, is that corporate earnings are strong, and the economy is holding up. 

“A strong economy keeps rates high and also helps bonds compete with stocks,” he said.

Bianco doesn’t believe the Fed is finished hiking interest rates, despite a stock market that says the opposite. 

“Financial conditions are tightening, meaning the markets are leaning on the economy,” he said. “In the last 18 months, the market has been completely wrong on the fed, so be careful letting the market do the work for you.” 

Another thing the markets haven’t yet come to accept as reality, according to Bianco, is the sweeping and permanent fallout of the Covid pandemic on how work can be done remotely for roughly half the U.S. workforce. 

“Things have changed,” he said, poking fun at managers still intent on bringing workers back into the office where they are often less productive and less happy. 

“Different is not dystopian, and different is not worse,” he said. “Different is just different.” 

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