Why TLT Tanked After Fed Rate Cut

TLT has fallen by more than 7% since September 16.

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sumit
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Senior ETF Analyst
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Reviewed by: Kent Thune
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Edited by: James Rubin

Ever since the Federal Open Market Committee cut its benchmark federal funds rate last month, it’s been straight down for one of the most popular bond ETFs.

The iShares 20+ Year Treasury Bond ETF (TLT) has fallen by 7.4% since it made a one-year peak on Sept. 16—two days before the Fed slashed rates by 50 basis points. In Friday afternoon trading, TLT was down slightly. 

TLT is now off 2.3% on a year-to-date basis, frustrating some investors who had hoped that the arrival of Fed rate cuts would boost the exchange-traded fund. 

Instead, a number of better-than-expected readings on the U.S. economy, including last week's nonfarm payrolls, not to mention the latest uptick in the Consumer Price Index have caused traders to reevaluate how many Fed rate cuts could be in store. The economic data has suggested that growth has remained solid, making rate cuts less urgent. Less than a month ago, CME Fed Watch tool even showed a more than 33% probability of a second consecutive 50 bps increase. 

etf.com

The latest pricing of fed funds futures suggesting that rates could bottom out around 3.4% at the end of next year—notably higher than the 2.7% that was expected when TLT peaked on Sept. 16.

Still, despite the near-term price declines, investors aren’t abandoning TLT en masse. The ETF has experienced outflows of $1.2 billion since it reached its September peak, but year-to-date inflows remain healthy at $9.6 billion.

TLT, the Portfolio Hedge

Despite its recent pullback, many investors appreciate that TLT has acted like more of a portfolio hedge this year.

When economic growth concerns have flared up, the ETF has rallied. When those concerns have abated—as they’ve done recently—the ETF has fallen.

That’s a welcome development for investors who saw the ETF move down steadily in 2021 and 2022, even in the face of rising recessions risks and a stumbling stock market.

As long as inflation remains relatively muted, TLT can continue to play a role as a portfolio hedge.

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.