TLT: The Case for Stability

iShares' 20-year bond ETF looking good as interest rates find a sweet spot.

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Reviewed by: Andrew Hecht
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Edited by: Andrew Hecht

Rising interest rates are profoundly affecting markets and lives around the world, to the degree they may form the biggest drag on the global economy in 30 years, according to comments last week from the International Monetary Fund. 

In the U.S., a direct hit to many households is the fact that a conventional 30-year fixed rate mortgage has doubled to beyond 6% in less than two years.  

The exchange-traded fund industry gives investors a way to participate in that change. The iShares 20+ Year Treasury Bond ETF (TLT) is a fund that reflects long-dated U.S. interest rates; it rises when they fall and declines when rates increase.  

TLT is highly liquid and follows the U.S. government bond market. The fund has had $7 billion of inflows in the past three months. At nearly $109 on April 6, TLT had $34.7 billion in assets under management and trades an average of over 27.85 million shares daily, charging a 0.15% expense ratio.  

TLT had a rough 2022, dropping 33% to $99.56 per share. The Federal Reserve aggressively increased the short-term fed funds rate last year, and quantitative tightening pushed rates higher further out along the yield curve.  

The fund gained 6.8% in the first quarter. While quantitative tightening continued at $95 billion monthly, the Federal Open Market Committee only increased the short-term fed funds rate by 50 basis points over the first three months of this year. At the latest meeting, the end-of-year target stood at 5.13%, implying only one more rate hike in 2023.  

TLT Stabilized This Year 

After falling steadily from the early 2020 peak, TLT hit a low of $91.85 low in late October 2022. 

 

Source: etf.com 

 

The chart above shows TLT has not made a lower low in 2023, and the trend has shifted to higher lows since the October 2022 bottom.  

Banks, Turmoil and Rate Hikes 

Rate hikes weigh on bond prices and TLT. Since March 2022, the Federal Reserve increased the short-term fed funds rate from 0.125% to 4.875%. Aside from the aggressive trajectory of hawkish monetary policy using the central bank’s primary tool, the quantitative tightening program has lifted rates further along the yield curve.  

The first shoe to drop was a series of bank failures and rescues involving Silicon Valley Bank, Signature Bank and Credit Suisse, all apparently victims of hawkish rate policy.  

The bank failures resulted from poor management of bond investments as the banks suffered massive mark-to-market losses that prevented them from meeting customers’ withdrawal demands. Moreover, the regulators and central banks were asleep at the wheel as stress testing failed.  

The aftermath of bank failures is a time of introspection for financial institutions, central banks, regulators and legislators. The potential for systemic risks from rate hikes could curb the Fed’s enthusiasm for fighting inflation with monetary policy. At its latest meeting, the FOMC forecast of a 5.13% fed funds rate at the end of 2023 implies only one more 25 basis point increase.  

Inflation Remains a Concern 

Meanwhile, inflation remains a pandemic legacy, thanks to vast government spending, artificially low rates and supply chain bottlenecks. However, the bifurcation of the world’s nuclear powers with the China-Russia “no-limits” alliance and Russia’s invasion of Ukraine have caused roadblocks to trade as well as to the flow of essential food and energy commodities worldwide. The supply-side inflationary pressures are beyond the Fed’s and other central banks’ monetary policy reach.  

The U.S. central bank, the European Central Bank and others cite 2% as the inflation target and benchmark. The level is arbitrary, and supply-side issues caused by the geopolitical landscape could make the 2% goal impossible.  

Will Hawkish Policy Grind to a Halt? 

TLT acts as a barometer for the long end of the U.S. government bond market. The recent trend suggests that the rate hikes could end, and the quantitative tightening may slow.  

 

Source: etf.com 

 

The one-month chart above highlights TLT’s pattern of higher lows and higher highs, a stabilization of rising rates. The Fed commented that the recent bank failures would likely cause financial institutions to tighten lending criteria, resulting in the private sector taking over for the central bank.  

TLT Stability 

I expect stability in TLT as rates find a sweet spot around the current levels.  

 

Source: etf.com 

 

The above chart from etf.com’s Fund Flow tool highlights significant inflows in TLT during the first quarter. Markets rise when buyers outpace sellers; increasing net flows is a bullish sign for TLT.  

Interest rates at the highest level in years make fixed income products more attractive than stocks for investors. As markets reflect the economic and geopolitical landscapes, which remain highly uncertain as we move into the second quarter, the bond market will likely continue attracting investment capital, pushing TLT higher.  

Andrew Hecht is a Nevada-based writer and analyst covering stocks, bonds, foreign exchange, cryptocurrency and raw material markets. He has over four decades of experience in markets across all asset classes, concentrating on commodity markets. Hecht was a senior trader at Salomon Brothers in the 1980s and 1990s, running sales and trading businesses. In 2013, McGraw Hill published his book, “How to Make Money in Commodities."