The Fed's 50bps cut was a surprise to some, and so was the reaction in bonds. TLT is down around -3.5% from the September high when many thought it would rally if the Fed cut 50bps.
Instead of falling after the Fed lowered rates, the 10-year and 20+ year yields have risen. This seems incongruous given the dovish Fed talk.
Long-term bond yields have been rising since the Fed cut, led by rising inflation expectations. If the market senses that the Fed is allowing higher inflation to protect full employment, the yields could spike higher as inflation expectations de-anchor.
The US national debt is rapidly increasing, exposing long-dated government bonds to significant inflation risk, making iShares 20+ Year Treasury Bond ETF very risky. Rate cuts by the Fed mostly affect short-term rates, while long-term yields are driven by inflation expectations, which are rising. The Fed is increasingly the primary buyer of long-dated US debt, as organic demand dwindles, pushing long-term yields higher.
The current environment for treasury bonds remains favorable for upward trades in the near term, with the biggest consideration being the time frame that an individual trader is working in. We expect to see upward moves lasting a few days and others lasting several weeks.
TLT just broke out, reaching a higher high for 2024, driven by anticipated rate cuts and lower inflation, and should be expected to trend higher. Long-term Treasuries offer steady income, high credit ratings, and act as a hedge against equity downturns, especially amid global economic uncertainty. TLT's chart shows a rounded bottoming pattern, indicating strong potential for further gains, particularly with forthcoming rate cuts and potential market weakness.
Historical Fed rate pivots often precede recessions, highlighting deeper economic issues and potential downturns following interest rate cuts. Sharp declines in insider buying and job openings, coupled with rising consumer credit card delinquencies, signal significant economic stress and potential recession risks.
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The iShares 20+ Year Treasury Bond (TLT) ETF has crawled back in the past few months as concerns about the American economy have risen. The TLT ETF fund jumped to a high of $100 earlier this month, its highest point since May 2021.
TLT recently experienced a strong rally due to disappointing economic data and slower inflation, improving its negative correlation with the equity market. CPI YoY dropped below 3% for the first time since 2021, increasing expectations for Fed rate cuts and indicating that inflation is not capping TLT's upside potential. With the recent unemployment rate at 4.3% and the historically reliable Sahm Rule triggering a recession signal, the economy faces growing risks amid a still inverted yield curve.
Government bonds are making a comeback in 2024 after a years-long bear market resulted in the longest stretch of price declines in recent memory.
For much of 2024, the stock market has been driven by two seemingly opposite forces: the exceptionally strong performance of the S&P 500 and the biggest, mostly tech companies, and by persistent recessionary fears driven by concerns over a possible artificial intelligence (AI) bubble, consistently high interest rates, and the ever-increasing indebtedness of the Federal Government.