The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) is up 4.7% over just the past month, an impressive move for a bond fund in a short period, but that does not mean this high-flying is out of upside. Actually, the opposite is true.
Four of this year’s top 10 asset-gathering ETFs are bond funds, but some market observers are concerned investors are glossing over underlying weakness in the bond market. Investors may be attracted to the cheap valuations and wider yield premiums that these bonds offer over safe-haven government bonds after benchmark yields on 10-year Treasuries dipped back toward all-time lows. Moreover, the rebound in energy prices could have reassured investor fears of a potential defaults in the energy space.
Add to that, Treasurys have been buoyed by a Federal Reserve that has consistently passed on raising interest rates this year. There are some obvious fundamental factors that bode well for U.S. debt ETFs, namely a slew of negative interest rate policies throughout the developed world, which make the low yields on U.S. bonds look all the more attractive.
However, TLT’s technical outlook is alluring as well.
“Sometimes the chart pattern works and sometimes it doesn’t. And when the chart pattern doesn’t work, it means the move/trend may be too strong and we need to re-do the math and harmonics. One such pattern that didn’t work was on the 20+ year treasury bonds ETF – $TLT,” according to See It Market. “This simply means that bonds (and the TLT rally) may not be done yet. Interesting… especially as we head into the BREXIT vote and deeper into the US elections with uncertainty in the air.”[related_stories]
TLT has been a popular Treasury bond play for yield generation over the past few years after the Federal Reserve implemented near-zero interest rates and a robust bond purchasing program. However, TLT comes with a 17.72 year duration – a 1% increase in interest rates would translate to about a 17.72% decline in the fund’s price.
According to the Bank of America Corp.’s U.S. Treasury Index, Treasuries have returned 4.8%, the most at this period of the year since 2003, as traders anticipated a falling likelihood of a Federal Reserve interest rate hike, with the probability of a move this year dipping to about 49% from 74% at the end of May, Bloomberg reports.
“Technically, it means that 145-146 isn’t out of the question for the TLT. A continuation of the rally in bonds would likely coincide with some additional downside in equities (or sideways chop),” adds See It Market.
For more information on the fixed-income market, visit our bond ETFs category.
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.