ETF Trends CEO Tom Lydon discussed the iShares 20+ Year Treasury Bond ETF (TLT) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The iShares 20 plus Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.
Long-term Treasury bonds will continue to play an important role in a diversified portfolio. We will continue to experience more volatility in a late-stage bull market. The Federal Reserve will maintain a lower-for-longer rate environment.
The loose monetary policy supports fixed-income assets. In an emergency meeting, the Federal Reserve cut interest rates by half a point to 1.00% to 1.25%. This is the first emergency rate cut meeting since the financial crisis. It was most likely in response to falling rates in the Treasury bond market as yields fell and bond prices rose in response to the recent risk-off selling.
New bets that the Fed may continue to cut rates at its upcoming meeting on March 17-18. Options activity showed traders were betting on a 48% chance the Fed cut rates to 0.50% to 75%. There’s a 52% chance Fed cuts rates to 0.25% to 0.50%
Safe-Havens In Flux
Safe-haven U.S. government bonds continue to strengthen on worsening market expectations. Many anticipate the U.S. economy to slow pretty close to zero or even dip into negative territory in the first half of this year. As the coronavirus continues to spread, the American consumer will do less consuming.
The recent activity in bond markets is also about a flight to quality as investors shift to a risk-off attitude. U.S. government bonds are the go-to, knee-jerk safe-haven play
As noted, TLT provides exposure to long-term U.S. Treasuries with maturities greater than 20 years. It currently has a 1.64% 30-day SEC yield, with an 18.70-year effective duration. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a longer duration means higher sensitivity.
If interest rates were cut down 1% from current levels, TLT’s would gain approximately +18.7%. However, this means that TLT could stand to lose more if the Fed decides to hike interest rates.