By Spencer Jakab
Buying U.S. Treasury bonds used to be cumbersomenot to mention pretty boring.
Thanks to financial innovation, though, investors dont have to worry about things like clipping coupons. And they can earn almost Nvidia-like returns if they get the timing of sentiment about Fed rate cuts just right.
Retail investors might not be able to whip out a slide rule and calculate Macaulay duration the way a bond geek can, but it is pretty common knowledge that the most bang for your buck comes from owning the longest-dated bonds.
Enter TLT, the ticker symbol for BlackRocks iShares 20+ Year Treasury Bond Exchange Traded Fund. The ETFs assets recently ballooned to more than $50 billion, and about 34 million sharesor $4 billion worthchanges hands on average each day.
Back at the start of 2020 it was just another boring, low-yielding way to get some safe income with 126 million shares outstanding. After the Fed slashed rates to zero, sending longer-term bond yields plunging, that got as low as 88 million in the spring of 2021.
But TLT started to attract interest when the Fed started raising rates in 2022, and it became a hot retail trade last fall. Shortly after the 10-year Treasury note came within a whisker of crossing the 5% yield level, the favorite parlor game on CNBC became how many times the Fed would cut interest rates this year. Six was the optimistic number, and it helped send the total return of TLT to a very un-bondlike 23% between mid-October and late December. On an annualized basis, that return was about 103%.
Like many popular retail trades, this one got crowded just when it might have been time to pull the ripcord. TLTs shares outstanding mushroomed to as much as 530 million by mid-February.
Unfortunately, the year-to-date return on TLT has lagged the S&P 500 index by more than 14 percentage points. That has started to hurt its popularity, with the number of shares down to about 510 million as of Friday.
The Fed is widely expected to leave rates unchanged Wednesday, and expectations have undergone a major shift. On the date TLT peaked the expectations tracking tool provided by CME showed traders put 98% implied odds on the bottom of the Feds overnight rate range being lower than 4.5% by the end of the upcoming summer. Now the chances of that happening are barely 1%.
as footer: This analysis comes from the Journal's Heard on the Street team. Subscribe to their free daily afternoon newsletter here_._
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(END) Dow Jones Newswires
March 20, 2024 12:38 ET (16:38 GMT)
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