Treasury exchange traded funds, such as the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), are viewed as sensitive to rising interest rates. However, Treasurys are also universally viewed as a safe-haven asset and that trait could support TLT and rival ETFs in the near-term as global equity markets slump.
While bonds typically have an inverse relationship to rising rates, the Fed’s rate hike decision on Wednesday fueled appetite for U.S. assets from foreign investors, report Eddie Van Der Walt and Anooja Debnath for Bloomberg.
With commodity prices falling, traders are anticipating lower inflation, which would help preserve the value of fixed-income payments. Since long-term debt securities are more sensitive to the inflation outlook, Treasury bond funds with longer durations are outperforming.
Looking at historical data, every time the Federal Reserve hiked rates over the past four decades, Treasuries with longer maturities have outperformed short-term debt and even exceeded corporate bonds in the first year of tightening as higher rates depressed inflation and kept the economy from overheating, Bloomberg reports. Treasuries only underperformed once in the period.
TLT’s “prices have swung up and down in a tighter and tighter range, like a watch spring being wound up. Prices have crisscrossed back and forward around the 50-day and 200-day moving averages,” according to TheStreet.com. “Prices could break out in either direction, but with commodity prices weak, we would favor an upside breakout for the TLT. If fear grips the stock market, we could see the TLT rally back to the $135-plus area. Yes, interest rates will ultimately be going up in the future. But for the next six months investors will favor safety over returns.”