As expectations that the Federal Reserve will soon raise interest rates have ebbed, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has enjoyed the more sanguine fixed income environment to gain more than 2% over the past month.
Today, the world’s bond ETFs have nearly $500 billion in assets under management and the number for U.S. fixed income ETFs could continue growing as the Federal Reserve dithers on when to raise interest rates.
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 TLT.
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. [Demise of Treasury ETFs Over-exaggerated]
On a technical basis, the charts say TLT is poised for a significant move in either direction.
“The weekly chart for this treasury bond ETF shows a higher low, but a lower high, so patience is important here until we see a confirmed break either way,” according to See It Market. “The Commitment of Trader’s (COT) data may finally be giving us something for this market. “Smart money” commercials have reduced their net futures position over 300,000 contracts since late 2014, and are now holding their lowest net position since May 2013. At the same time, “dumb money” small speculators have increased their net futures position about 130,000 contracts since June and are at one of their most bullish positions in the past couple of years. Keep a close eye on treasury bonds as this could get interesting (and volatile) in the days ahead.”
Others point out that the current expansion is the weakest in the post-World War II era, and the economy is still struggling to grow fast enough to generate enough inflation to trigger a sell-off in fixed-income assets. Specifically, wage growth remains tepid, diminishing the outlook for wage inflation.
Moreover, the last time 10-year Treasuries were this cheap relative to short-term debt in September, U.S. government debt rallied over the following three months.
iShares 20+ Year Treasury Bond ETF
Tom Lydon’s clients own shares of TLT.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.