TLT: Why Hold Long Bond ETFs in 2024?

TLT: Why Hold Long Bond ETFs in 2024?


Bond ETFs have had a rough 2024.

After a historic bear market for bonds ended in October of 2023, long-term bond ETFs led the charge in price appreciation in the fourth quarter. Investors expecting price appreciation in bond funds were rewarded with a 22% gain from the October low to the December high, as measured by the iShares 20+ Year Treasury Bond ETF (TLT).

But that’s where the bond rally ended, as 2024 brought with it three consecutive Consumer Price Index (CPI) reports showing a steady increase in inflation and falling expectations for the three rate cuts the Federal Reserve had previously forecast for the year.

As a result, from its 2023 year-end peak, TLT fell 8% through April 11, a day after the third consecutive inflationary CPI report.

With no recession or soft landing in site, is now a good time to invest in TLT?

Why Invest in TLT in 2024?

Investors may be drawn to the TLT ETF for a few key reasons, primarily for its potential for high returns when interest rates finally fall, but also as a hedge against inflation, for diversification purposes, and for its high liquidity. Here are details on why investors may choose to invest in TLT:

Potential for High Returns in Falling Rate Environments

TLT holds long-term Treasury bonds, and these bonds are particularly sensitive to interest rates. When interest rates fall, the price of long-term bonds tends to rise more than bonds with shorter maturities. This is because investors are willing to pay more for existing bonds that offer a higher fixed interest rate compared to newly issued bonds with lower rates.

Hedge Against Recession

If investors believe a recession is coming, they may buy TLT to potentially benefit from the price increase that could accompany falling interest rates. During economic downturns, the Federal Reserve often cuts interest rates aggressively to stimulate the economy. This would amplify TLT’s price gains as rates and yields fall more than in a moderately disinflationary environment.

Diversification and Liquidity

A major aspect of diversification is building a portfolio of low correlation assets, which is why investors tend to hold stocks and bonds together. In most market environments and mix of stocks and bonds will help to minimize market risk while averaging long-term returns that outpace the average rate of inflation.

For example, as markets recovered in 2023, TLT was negative for most of the year, whereas stocks were strongly positive. TLT’s fourth quarter finish allowed it to end the year at just under 3% gain while stocks jumped 26% in the year, as measured by the SPDR S&P 500 ETF Trust (SPY).

Furthermore, TLT is a large and liquid ETF, making it easy for investors to buy and sell shares. At $47.8 billion in assets, TLT is the fourth largest bond ETF on the market and the largest long bond fund.

Risks of Holding TLT in 2024

Investors are wise to remember that ETFs with potential for high growth are also associated with potential for high market risk. Here are potential drawbacks of holding TLT now:

  • Interest rate risk: The greatest risk facing TLT in 2024 is interest-rate risk as the bond market continues to price in “higher for longer” rate environment. If interest rates rise, or inflation data continue to push yields higher, even without a rate hike, the price of TLT can continue to fall as it did in the first three months of 2024.

  • Lower current yields: While TLT offers the potential for capital appreciation, the current yield on long-term Treasuries may not be very attractive compared to other investments. With a 30-day SEC yield of approximately 4.5%, and short-term ETFs yielding as much as 5% with less interest-rate risk, TLT is not an ideal investment to hold for its income-generating qualities.

Bottom Line on Investing in TLT Now

Investors are wise to enter new ETF positions with a plan, which should include a holding period. The longer the holding period, the more it can make sense to dollar-cost average down and buy shares at lower prices, anticipating an eventual normalization of inflation and interest rates.

Investors should also keep in mind TLT’s interest-rate sensitivity. The longer the duration, the greater the price appreciation for bonds when interest rates are falling, but the opposite is true. If the disinflationary trend resumes by mid-2024, patient TLT investors would be rewarded again with price appreciation as occurred in the fourth quarter of 2023.

In the unlikely scenario that a recession begins later this year, the leading asset class is most likely to be bonds as stock prices and money market yields would fall. This makes TLT a good recession hedge and diversification tool.

But if the Fed can’t engineer a soft landing, meaning inflation remains higher for most of the year and investor hopes of rate cuts continue to be dashed, TLT’s price would likely continue to fall.

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