TLT's Meme Stock-Like Qualities

The iShares 20 Plus Year Treasury Bond ETF (TLT) had what they refer to in sports as a “career year.” And it had it in only one month. 

That month was last month, when TLT traded $99 billion in shares. That's a record for bond ETFs. 

Consider that its assets now stand at more than $40 billion, double what it held as of Aug. 4, 2020. Since that date, including dividends, TLT has dropped 45% in price. So, to summarize, TLT’s price drops by nearly half, while assets double. That’s some contrarian investing right there! 

And that brings us to now. TLT bounced off its low like a jackrabbit, from $83 to $88, a 6% move in a week.  

The question is whether that’s a sustainable rally and sea change, or is it February again? Nine months ago, TLT rallied from $99 to $109 and back to $99, very quickly. And since Oct. 20, just two weeks ago, its price travelled from $97 to $83. Still, TLT is a long way from its all-time high of $170. 

TLT's Stock-Like Price Analysis

It will take a rally of about 20% to get back to $109. That was in early April, when the 10-year U.S. Treasury yielded 3.30% and the 30-year bond stood at just over 3.55%. As of Friday afternoon, 4.55% and 4.74% were the respective levels. So using some back of the envelope math, we’ll need about a 1.25% drop in yields to get back there. 

Why all that price analysis when this is a bond ETF? And why am I asking if TLT is the new meme stock, when it is not a stock at all? Because when we see price volatility like that, in my book, the asset in question ceases to be “bond-like.” And investors must ask themselves, “Is this a game I want to play?”  

Massive Flows Into TLT

Based on the massive flows into TLT, this is one of those situations that smells like a dot-com bubble-era “buy-the-bottom” situation. That doesn’t mean it won’t work out wonderfully for those who have and will buy TLT around the current price range. But the critical issue is how much of that $40 billion in assets really understands what it owns.  

BlackRock's iShares has two other exchange-traded funds that overlap that area of the yield curve, the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 10-20 Year Treasury Bond ETF (TLH). A newer ETF, aptly named the US Treasury 10 Year Note ETF (UTEN) made its debut this August and has gathered $65 million in assets.  

The popularity of TLT begs the question: are retail investors piling in, thinking this is the bond market’s version of the SPDR S&P 500 ETF (SPY)?

TLT's Sensitivity to Interest Rates

Do investors realize that 20- to 30-year Treasuries are the most volatile type of government bonds, and that because you don’t own the bonds directly, buying and holding TLT carries the risk that you won’t recover the principal in the foreseeable future, if ever? 

That’s because those bonds have longer durations, which is a bond market term which reflects how sensitive a bond or bond exchange-traded fund is to interest rates movements. TLT’s duration is 16.5, which means a 1% change in rates should change its price by about 16.5%. 

It is quite possible that TLT is dominated by institutional investors. If that’s the case, this new darling of the ETF business may make headlines for a different reason: TLT has plenty of options activity, and there is undoubtedly plenty of leverage applied to some investors’ holdings. That likely means that in all the recent price whipsaw, one or more major holders, a hedge fund perhaps, is about to blow up.  

That’s supposed to happen to meme stocks and “dot-bomb” stocks from a generation ago. This is the bond market we are talking about. So it seems many investors new to bonds will need to get up to speed quickly on the wide range of potential outcomes when TLT and other long-term bond ETFs are a core part of their investment strategy.