TLT Oddity Shows How ETFs Are Changing How We Invest

TLT Oddity Shows How ETFs Are Changing How We Invest

Popular Treasury ETF influencing stocks and bonds alike.

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Reviewed by: etf.com Staff
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Edited by: Kent Thune

There is a picture I can’t stop looking at in my mind. This picture reminds me of the Seinfeld TV series episode, “The Kramer,” where Jerry’s hilarious sidekick poses for a painting.  

A high-brow couple sees it at an exhibit and says, "He's a loathsome offensive brute, yet I can’t look away." When we consider the damage that the iShares 20+ Year Treasury Bond ETF (TLT) has done to some investor portfolios during its 47% decline (inclusive of dividends) since August 4, 2020, that same description may apply. 

It’s not only the crash in TLT and flood of recent investor interest the Treasury ETF has garnered; it’s the shape of the U.S. Treasury yield curve, particularly at the 10-year and 30-year maturity levels.

20-Year Treasury Yield Above the 30-Year 

As of Monday, the 10-year Treasury yielded 4.88% and the 30-year yield was 5.04%. That part of the curve is again “upward-sloping” the way it usually is, since the longer you lend money to the U.S. government, the more income you want as compensation for the length of that loan.  

Between five years and 30 years to maturity, yields are back to normal, upwardly sloping. Except, that is, for 20-year Treasuries. They yield 5.21%, comfortably above the 30-year by 0.17%. 

Since the beginning of 2000, nearly every time that divergence existed, it coincided with a period in the stock market and economy where things were getting bad, and about to get much worse. Specifically, during the buildup to the worst part of the dot-com bubble and the Global Financial Crisis, and now. The 20-year yield has exceeded the 30-year since October 2021. 

What is the 20-year bond telling us this time around? We can’t say for sure, but it may just have something to do with TLT. 

Explaining Volatility in TLT Price 

The surge of buyers apparently had plenty of activity on the sell side, enough to turn a lot of that new investor money into losses very quickly, as rates continued up and TLT continued to go down in price. Since TLT is focused on the last one-third of the maturity spectrum from 20 to 30 years and does not invest in the benchmark 10-year Treasury bond, it’s possible that the sell side or short side (including lots of option trading around TLT) is creating an unusual “bump” in the yield curve at the 20-year mark. 

TLT is gradually taking its place alongside the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) on the Mount Rushmore of popular ETFs. However, TLT may not be the best ETF to invest in long-term bonds. The higher yield is a benefit for the moment, but TLT could have a lot of outside “noise” in the form of an array of market participants who are using that ETF for trading strategies. There might be less dramatic surroundings for bond investors to research.  

This may explain how the 20-year yield rose sharply, and why TLT has been such a drag for anyone who tried to buy the dip, thinking the bottom was at $120, or $100, or at $85. It closed on Monday at $84.  

Instead, what investors, and especially fiduciary financial advisors pining to “pick the bottom” should be doing is determining what their investment process is for owning TLT, or any other bond ETF, after this historic rise in interest rates across the U.S. Treasury yield curve. And, in what size allocation makes sense for the investor. 

The U.S. Treasury yield curve between 10 and 30 years to maturity is a loathsome offensive brute. But until the TLT oddity reverts to normal, I can’t look away.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.