The TLT May Drop Further Amid Higher Inflation And Term Premiums

seekingalpha04-17

iShares 20-Year Treasury ETF (TLT) is expected to decline further as economic data and inflation expectations rise.Inflation is projected to remain above 3% through July, potentially slowing to 2.7% ...

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Since then, inflation data has been hot and inflation expectations have risen sharply. On top of that, the job market remains robust, and the Fed has lifted its longer-run rate projections in its Summary of Economic Projections. It's becoming clear that the economy's neutral rate appears to be higher than most investors expected, and more importantly, it probably means that rates on the back of the curve still have more to rise, indicating the TLT declines aren't over yet. Higher Inflation The CPI year-over-year rate of change has been well anchored in the 3% to 3.5% range since June 2023, and based on CPI swaps, it seems that inflation in the CPI will remain over 3% at least through July and possibly the balance of 2024. CPI swaps show inflation at 3.4% in April, 3.5% in May and June, and 3.3% in July. Due to base effects, there's a chance that by August, the rate of change will slow to 2.7%. However, inflation swaps tend to underprice inflation risk the further one moves from the present, based on observation. BloombergMeanwhile, 30-year breakevens have been trending higher and have reached 2.37%, well off the lows witnessed in late December when they fell to around 2.15%. The sudden change in path suggests that the market is now seeing more robust growth and inflation running higher than previously believed, while trending back to the previous highs. BloombergTLT Technical Trend Of course, technically, the TLT has fallen below that support level at $93 and is now working its way lower to fill the technical gap around $85. It's also visible that another gap has been filled on the TLT, around $88. A break of $88 would set up that potential return to $85. More importantly, a case could be made where the TLT undercuts the lows seen in October 2023, which were around $82. Trading ViewTerm Premium Remain Negative The case for the TLT to make new lows would be due to the 30-year Treasury exceeding the high yield rate of around 5.10% in October. One reason is that the term premiums for 2,5, and 10-year rates based on an NY Fed model are all negative. In October, the 10-year Term premium reached a positive 40 bps. That would suggest that the recent move higher in nominal rates is not related to the expansion of the term premium. While we do not have a value for the 30-year term premium, the data shows that the term premiums for the 2,5, and 10-year rates move together. If the term premium starts to move higher across the Treasury curve, it could result in the 30-year term premium rising as well, only adding to the recent rise in nominal rates. BloombergGoing back to the 1950s, generally speaking, the vast majority of the time, bonds have traded with a positive term premium, not the current negative stance we have seen in the market starting roughly in 2014. Bloomberg A rise in the term premium coupled with a hotter-than-expected path for inflation and the potential of a higher neutral rate certainly skew the risk for the rates on the back of the Treasury curve to trend higher and even surpass the highs seen in the Fall. That would suggest that the lows in the TLT have yet to be seen, and new lows may await.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428870649"}