The prolonged downturn in the US long-term Treasury market continues, with the largest exchange-traded fund (ETF) tracking long-duration US government bonds hitting its lowest closing level since June 2004 on Wednesday. As robust economic data further strengthens expectations that the Federal Reserve will maintain its tightening monetary policy stance, the multi-year bond market selloff shows no significant signs of abating.
BlackRock's iShares 20+ Year Treasury Bond ETF (TLT.US) dropped 1.6% to close at $80.46 on Wednesday, marking the fund's lowest closing price since its inception. The latest data released that day indicated that US economic activity remains vigorous, triggering a further decline in Treasury bond prices. Since its peak in 2020, TLT has accumulated a decline exceeding 50%. Following the outbreak of the COVID-19 pandemic in 2020, the Fed slashed interest rates to near zero to support the economy, causing US bond prices to surge and TLT to reach elevated levels. Since then, as the monetary policy environment reversed, long-duration Treasuries entered a sustained correction.
TLT, established in 2002, currently manages approximately $45 billion in assets. In recent years, many investors have used this fund as a tool to bet on a bottom in the US bond market and an eventual decline in interest rates. However, persistent rate hikes, sticky inflation, and the pressure of increased debt issuance stemming from the expanding US government debt burden have continuously weighed on long-term bond prices.
Todd Sohn, chief ETF strategist at Baird Strategas, noted that markets have undergone a massive institutional shift since 2020, and investors have realized that even a product with "US Treasuries" in its name does not imply low risk. He pointed out that investors need to understand the interest rate risk posed by duration, and that TLT itself is a highly volatile investment vehicle.
Behind the latest wave of bond selling is the growing market expectation that the Fed will tighten monetary policy further in the coming months. Fed officials raised the overnight borrowing rate last week for the first time since 2023. Short-term Treasury yields have risen particularly sharply recently, but because long-dated bonds are more sensitive to rate changes, the impact of rising rates on TLT has been more pronounced.
The performance of long-duration Treasuries also reflects the broader predicament facing fixed income investors today. Rising interest rates and inflation erode the real value of future cash flows from fixed income assets, pushing bond prices down and yields up, with longer-duration bonds typically suffering larger price shocks. Nevertheless, long-term US Treasuries still pay coupon interest, which partially cushions losses from bond price declines.
After accounting for dividend income, TLT's total return so far this year stands at negative 4.8%, better than the 7.7% decline in the fund's share price over the same period. Even so, TLT's performance remains significantly behind shorter-duration US Treasury products. So far this year, BlackRock's ETF tracking 7 to 10-year Treasury bonds has posted a total return of negative 3.7%, while a product investing in 0 to 3-month Treasury bills has delivered a positive total return of 2.6%, highlighting the divergent performance of bonds with different maturities in the current high-rate environment.
Eric Balchunas, ETF analyst at Bloomberg Intelligence, described TLT as an "extremely punishing" trade in the bond market, underscoring the substantial risks involved in betting on a rebound in long-term Treasuries. Balchunas stated, "Betting on TLT is not easy; it is a very difficult trade to execute."
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