TLT, Bond ETFs Higher on Economic Reports, Fed

While market observers awaited the Fed’s decision on interest rates Wednesday, a bevy of economic reports showed the U.S. economy growing at a slower pace than in previous months. 

The bond market proxy, iShares 20+ Year Treasury Bond ETF (TLT), traded nearly 1% higher on hopes that the slowdown would justify rate cuts in 2024, but the gain fell by half by midday in U.S. trading, as investors braced for monetary hawkishness from Fed Chair Jerome Powell’s afternoon speech. 

The ADP employment report, the U.S. Commerce Department’s construction report, the Institute for Supply Management Purchasing Managers Index (PMI), and the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) were all released Wednesday morning ahead of the key interest rate news. 

The ADP report revealed that 192,000 jobs were added in April, higher than the 183,000 expected, but down from 203,000 in March. 

Meanwhile the construction report said construction spending dipped by 0.2 percent, the PMI showed a slight contraction in manufacturing at 49.2%, and the JOLTS index showed job openings and hires changed little in March. 

TLT, Bond ETFs Down But Not Out in 2024 

The TLT ETF is down 10% in 2024, but the year is only four months old, and TLT is still nearly 5% higher than its October price low. For TLT and the broader bond market to see more price declines this year, inflation would need to continue to move higher than the bond market expects, as it did in the first three months of 2024. 

Securities prices are largely supported by investor expectations in the short term. The bond market is currently pricing in a nearly 90% probability that the FOMC will continue to hold its key interest rate steady at its next meeting in June, according to the CME FedWatch Tool.  

The bond market now prices in only a 49% probability of a rate cut in September and roughly 60% for a rate cut in November.