TLT Rally: Thanksgiving Guest or Move Back Home?

The 10-year yield is getting close to a familiar trading area, affecting Treasury ETFs.

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Reviewed by: Kent Thune
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Edited by: Lou Carlozo

ETF investors ignore technical analysis (or charting) at their peril. That has become more obvious for stock and bond markets as we near the close of 2023.

This branch of investment analysis—considered akin to voodoo a few decades ago—is apparently driving markets to an extent not familiar to many investors.  

They should get used to it. Just as with fundamental and quantitative analysis of securities and markets, the focus for any investor is not what worked in the past based on theory but what the markets reward and punish now and in the future.  

That brings us to TLT and the U.S. Treasury bond market. 

Economic History and 10-Year Treasury Yield

Earlier this week, U.S. leading economic indicators fell for the 19th straight month. That has not happened since late 2007 through 2009, the global financial crisis. Maybe we will get a recession in 2024, but if so, perhaps not a terrible one, the so-called “soft landing.”  

Or maybe— after more than a decade of debt built up by governments, corporations and consumers—an era of higher interest payments on that debt will crush one, two or all three of those economic segments.  

Entering 2022, the 10-year Treasury yield had not crossed above 3% since 2018, and had not posted a 4% yield since 2008, other than a single, intraday touch of that mark in April 2010. So, imagine the pleasant surprise for savers and investors, and the long faces of chief financial officers and borrowers, when the 10-year, tied to mortgage rates and many other types of debt, ripped higher from 1.5% to more than 4% in the first 10 months of that year.

10-Year Yield and Technical Analysis

2023 has been in many ways a textbook case of analyzing technical levels in the 10-year bond yield. Two chart trends in the 10-year bond yield have been in play recently. 

The first is the 4.2% yield level. That’s about where the 10-year stopped rising just over a year ago, and after dropping into the mid-3% range, spent the latter part of the summer and early autumn trying over and over to move higher above that yield level. When it finally “broke out,” the impact was fierce. From 4.3% to 5.0% in only five weeks. That’s a historically dramatic move. 

But it didn’t last long, because technical traders and round numbers get along famously. So, the 10-year yield quickly retreated, all the way down to its Wednesday afternoon level of about 4.4%. It looks like a strong possibility it will head to 4.3%, just as the chartists would prefer, though the yield briefly hit 4.49% Friday morning.  

The market may maintain that 4.3% to 5.0% range, or pierce below it. If the latter occurs, the narrative will be either that inflation is solved and the economy will be fine, or that a recession is coming, and lower rates are in sync with lower economic growth.  

Yet technically the 10-year Treasury yield, which had steadily moved higher since April, broke that “uptrend.” Now what? That’s for ETF investors to monitor and act on for themselves with this additional perspective.

TLT and the 10-Year Treasury Yield

Finally, that leads us to the wildly popular iShares 20+ Year Treasury Bond Fund (TLT), which doesn’t invest in 10-year bonds but tends to be highly correlated to what it does. Despite TLT’s recent rally, its price remains less than half of its 2020 high.  

To technicians, that means it has a lot of “work” to do to cross a series of price thresholds, before the rally can be dismissed as nothing more than a short-term bounce. If it can do that, long-term bonds will look more like a great part of a long-term allocation, rather than the balanced portfolio performance crusher of the past three years. Other bond ETFs that patrol this area, such as the SPDR Portfolio Long Term Treasury ETF (SPTL) and the Vanguard Long Term Treasury ETF (VGLT), are in a similar situation. 

This is like having your child return home for Thanksgiving and unexpectedly declaring they brought all their things with them and intend to move back in. 

TLT Price Action: What's Next?

TLT traded at around $91 on Wednesday afternoon and dipped Friday morning to just under $90. The $97 and $103 levels represent where it peaked in August and June, respectively. That would mark a start for bond bulls. 

Finally, consider the range of price levels described above. This is bond ETF investing we are discussing, not the equity market. So, before investors decide they should be “YOLO-ing” TLT or other long-term bond ETFs, they should take account of what they truly aim to accomplish in the wake of a 46% drop in that security in recent years. When bonds are as exciting as stocks, we know the markets have changed! 

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.