Why Is TLT Outperforming the S&P 500 in 2025?

The bond market proxy has more than doubled SPY’s gain this year.

Loading

Despite inflationary headwinds, the rate-sensitive iShares 20+ Year Treasury Bond ETF (TLT) has risen more than 5% in 2025, while the stock market proxy SPDR S&P 500 ETF Trust (SPY) has gained just above 2% as big tech has underperformed.  

Weren’t bond prices supposed to fall amid the inflationary potential of tariffs, tax cuts, and deportations? What explains TLT’s unexpected performance? The short answer is consumer confidence. 

Half of TLT’s 2025 gains have come this week as the Conference Board's consumer confidence index dropped 7 points, falling below expectations and marking the largest monthly decline since August 2021.  

Ironically, concerns about inflation, which had previously driven bond prices lower, are now driving them higher. A decline in consumer confidence can lead to reduced consumer spending, which is 70% of the U.S. economy, as measured by gross domestic product (GDP). 

The negative consumer confidence report came on the heels of last week’s Walmart Inc. (WMT) earnings, which reported higher revenue but a conservative outlook on sales. The leading retailer’s performance is often viewed as a barometer for consumer confidence. 

The CME FedWatch tool now projects a nearly 80% probability of at least a 25-basis point rate cut by the FOMC’s June meeting. One week ago, the odds sat at roughly 50/50. 

TLT, DOGE and Negative Sentiment

Adding to the backdrop of negative consumer sentiment is the potential for rising unemployment, as the Trump administration’s Department of Government Efficiency (DOGE) is aggressively laying off federal employees and retail store closures are mounting. 

While DOGE’s layoffs have not figured into inflation data yet, some estimates project as high as 100,000 job losses over the next two years. Meanwhile, up to 15,000 brick-and-mortar store closures are expected this year, according to an NBC News report that cited data from Coresight Research.

Sentiment, Unemployment, and TLT

A decrease in consumer confidence coupled with rising unemployment can lead to reduced consumer spending and slower economic growth. These conditions often prompt investors to seek safer assets, such as long-term government bonds, boosting demand for ETFs like TLT.  

  • Economic Outlook: Because of uncertainty over tariffs and potential unemployment, consumers are becoming more pessimistic about future business conditions, income prospects, and the job market. Economic uncertainties and stock market volatility have led investors to reallocate funds from equities to long-term Treasury bonds. 
  • Fed Policy: Federal Reserve Chair Jerome Powell has consistently emphasized the central bank's dual mandate to promote maximum employment and stable prices. The prospects for rising unemployment have TLT investors bidding up prices as they expect falling rates (prices and interest rates have an inverse relationship).  
  • Corporate Profits Decline: If consumers reduce spending, retailers and service providers may experience reduced sales. Companies may respond by cutting costs, delaying expansions, or even shutting down operations. 
  • Potential Deflationary Pressures: If demand drops significantly, businesses may lower prices to attract customers, leading to disinflation (a slowing rate of price increases) or even deflation (falling prices). However, this depends on supply-side factors—if costs (e.g., wages, materials) remain high, inflation might stay elevated despite weak demand. 

The next test for TLT and the broader bond market is Friday’s reading of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) report.