TLT Fans Maintain Rate Cut Hopes Before Fed Decision

Interest rates haven't budged since last July, and there's little to suggest that will change tomorrow when the Federal Reserve group that sets rates wraps up its June meeting.

Odds that the benchmark federal funds rate of 5.25% to 5.5% rates stay unchanged at the Federal Open Markets Committee meeting are just shy of 100%, according to the CME's Fed Watch tool. The next opportunity to hike will be in July, and the Fed Watch tool still deems an increase highly unlikely. Not until the September meeting do the odds start suggesting a cut is coming.

While the Fed warned of the "higher for longer" scenario, investors weren't ready to believe the central bank.

For stocks, the lengthy period of high rates hasn’t mattered. The Nvidia-led AI boom had trumped macro variables like inflation and interest rates to push the S&P 500 to record after record.

For bonds, the rates miscalculation has been more painful. Many of the investors who bought $24.4 billion of the iShares 20+ Year Treasury Bond ETF (TLT) in 2023 probably weren’t expecting the Fed to hold the line on rates for so long.

A lot of investors had believed that high rates would push the U.S. economy into a recession, which in turn would force the Fed to bring rates down.

TLT's Losses as Stocks Surge

But that didn’t happen. And when the bond market realized it wouldn’t happen, bond yields adjusted. The 30-year Treasury bond yield jumped from around 4% at the start of the year to as high as 4.8% in April. 

Today, it stands at 4.55% and TLT is nursing year-to-date losses of around 6%.

So far, investors in TLT haven’t given up. Since the start of the year, they’ve collectively invested another $1.5 billion in the ETF.

Recession or not, investors haven’t thrown in the towel on the prospect of Fed rate cuts. The pricing of fed fund futures indicate that the first cut could come in November and that rates could be 75 basis points lower than they are today by April 2025.

But even if those cuts come to pass, whether or not they translate into gains for TLT remains to be seen. After all, today the 30-year yield is almost a 100 basis points below the fed funds rate, suggesting that some level of rate cuts have already been priced in.