Fixed income exchange traded funds have been in the spotlight recently as market participants weigh what the outcome of this week’s Federal Reserve meeting will be. The group of must bond ETFs includes the widely followed iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT).
TLT is off 2.4% over the past month even as investors have put new money to work with the fund and as some positive fundamental catalysts remain in play. The diminished inflation expectations has bolstered demand for long-term maturities. The spread between two- and 30-year securities dipped for a fourth day after contracting to as little as 208 basis points Monday, the least since April 28, Bloomberg reports.
Long-term Treasuries have strengthened and yields dipped on the continued decline in oil prices helped push down inflationary pressures. Meanwhile, short-term Treasury yields have been anchored as speculators bet on a slow interest rate hike from the Federal Reserve.
However, questions have popped up regarding TLT’s technical strength. “Bonds have made a pretty substantial move higher in this recent pocket of volatility in the stock market,” Todd Gordon, founder of TradingAnalysis said on CNBC. “I think the stock market is beginning to stabilize and that’s going to set the bond market up for a little bit of a retracement.”
Gordon also warned that TLT is showing a “momentum divergence,” with a pattern of three lower lows in its relative strength index as prices made three higher highs. Consequently, the technical analyst believes the market is due for a pullback in the near-term. [Traders Cautious on Bond ETFs]
“The weekly chart is negative, with the ETF below its key weekly moving average of $122.25, which indicates risk to the 200-week simple moving average of $117.53, which is considered the uptrend for bonds. The weekly momentum reading declined to 65.81, down from 72.84 on Sept. 4,” TheStreet.com reported Monday of TLT.