TLT, Bond ETFs Are Top Performers Amid Iran Conflict

Bond ETFs surged Monday as concerns faded over Iran potentially blocking the Strait of Hormuz in response to U.S. airstrikes on Sunday. The iShares 20+ Year Treasury Bond ETF (TLT), a widely followed proxy for long-duration U.S. Treasurys, jumped as much as 1% in midday trading as yields fell across the curve.

Adding to the bond market’s strength were dovish signals from the Federal Reserve. Speaking at a central banking conference in Prague, Fed Governor Michelle Bowman said, “Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting.” Her comments echoed remarks made Friday by Fed Governor Christopher Waller, who acknowledged progress in bringing inflation down.

Traders took notice. Fed Funds Futures markets now reflect a greater than 20% probability of a rate cut in July, which is the first time that threshold has been crossed in a month, and a more than 60% chance of a September cut, up sharply from 47% just one month ago.

TLT Outperforms GLD as Growth Fears Take the Spotlight

While gold, particularly the $103 billion SPDR Gold Shares (GLD), has traditionally been a go-to safe haven during geopolitical flare-ups, last week’s price action suggests a shift in investor psychology. As Treasury yields dropped, TLT posted gains while gold’s price declined, signaling that investors are increasingly more concerned about slowing economic growth than inflation.

The reason? Though tensions in the Middle East have flared, including fresh worries over Iran’s response to U.S. military activity, the lack of disruption to oil transport through the Strait of Hormuz calmed fears of an immediate inflationary spike. Instead, with economic data softening and global manufacturing indicators turning lower, recession concerns are regaining prominence.

This has pushed more investors into long-dated Treasury ETFs like TLT, which benefit when yields fall. Unlike gold, which thrives in inflationary or crisis conditions, Treasurys gain favor when growth slows and rate cuts become more likely, exactly the narrative markets seem to be pricing in.

A Case for Diversification in 2025 and Beyond

If 2025 has proven anything, it’s that diversification is back in fashion, and it's paying off. For the first time in three years, a blend of asset classes, including bonds, international equities and commodities, has outperformed a purely U.S. stock-focused portfolio.

This year’s best-performing diversified strategies include:

• Long-term Treasury ETFs, like TLT, benefiting from shifting rate expectations
• Ultra-short-term Treasury ETFs, such as the iShares 0-3 Month Treasury Bond ETF (SGOV) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), offering attractive yields with lower duration risk
• Precious metals funds, like GLD, the iShares Silver Trust ETF (SLV) and the abrdn Physical Platinum Shares ETF (PPLT), offering both inflation protection and geopolitical hedging
• International stock ETFs, especially those concentrated in defense areas like the Select STOXX Europe Aerospace & Defense ETF (EUAD), buoyed by more attractive valuations, geopolitical tensions and a weakening U.S. dollar

As markets navigate a murky outlook filled with stagflation risks, global trade friction and ongoing geopolitical tensions, maintaining exposure to multiple uncorrelated asset classes may be essential. The outperformance of diversified portfolios in 2025 may serve as a blueprint for disciplined investors heading into 2026, where the only constant may be uncertainty.

For investors looking ahead, the takeaway may be simple: Don’t bet on a single outcome. Instead, build a portfolio that can weather many.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune held a long position in SGOV.