TLT, Bond ETFs Face Big Test With PCE This Week

After three consecutive months of disappointing inflation reports, a weakened bond market faces its next major test on Friday when the U.S. Commerce Department releases the Personal Consumption Expenditures (PCE) Price Index.

The PCE, which measures consumer spending on goods and services, is the favored measure of the U.S. central bank because it captures trends over time.  

The price of the bond market proxy, iShares 20+ Year Treasury Bond ETF (TLT) has, meanwhile, fallen nearly 10% this year, amid rising prospects of high-for-longer interest rates. 

The latest PCE will follow just two weeks after the March Consumer Price Index (CPI), another highly watched inflation gauge, showed a 3.5% year-over-year uptick—the same as in January and February. The CPI and PCE data have discouraged investors hoping that the Federal Reserve would cut interest rates this spring.  

The CME FedWatch Tool currently predicts with an 83% probability that the Fed’s overnight rate will remain unchanged in June, and the next best probability for a rate cut has now been pushed back to September. At the start of the year, markets had hoped the Fed would cut rates in March.  

PCE Consensus Forecast for April Reading

But The Friday report may be cause for mild optimism. Economists’ consensus estimate for the core PCE price index, according to the Cleveland Fed’s nowcast inflation forecast, is for a 0.3% month-over-month change and a 2.7% year-over-year reading. This would represent an unchanged MoM inflation rate but would mark a slight decrease from February’s 2.8% YoY rate.  

If PCE arrives as forecast, bond markets may savor a small victory the recent streak of sticky inflation data, which has dampened investor expectations.  

A 0.3% monthly inflation translates to a 3.6% annualized rate, which is far below 2022’s 9.1% peak inflation, yet still above the Federal Open Market Committee’s 2% goal. 

The higher-for-longer inflation and interest rates narrative is likely to remain in place for the foreseeable future. 

While a PCE reading in line with expectations may not move prices for TLT and other bond ETFs this Friday, another surprise increase in inflation would likely push bond prices lower from already depressed levels, analysts say. A surprise reading below consensus would likely push bond prices dramatically higher.