The TLT ETF Has Crashed 9% from Its Recent High. Here’s Why.

• Despite the iShares 20+ Year Treasury Bond ETF ( $iShares 20+ Year Treasury Bond ETF(TLT)$ ) seeing a net inflow of $1.868 billion in October, the ETF has declined 1.84% so far this month.

• While Fed rate cuts over the next year should trigger a bond market rally, the TLT has dropped approximately 9% since the Fed cut rates during the September FOMC meeting.

Source: Bloomberg, 27 Oct 2024

Trump Win Raises Inflation Risks:

Traders are now pricing in higher odds of a Trump victory, which could lead to soaring inflation due to his expansionary and trade policies. Consequently, FOMC rates may remain elevated for longer than expected.

Soft Landing/No Landing:

Economic data, including labor market metrics, retail sales, and PMI, indicate that the US economy is more resilient than anticipated. As a result, more investors are projecting a Soft Landing or No Landing scenario, lowering expectations for rate cuts.

Rerun of 1995:

The bond market is reacting similarly to the Fed's "insurance" rate cuts in 1995 amidst a resilient economy. The 10-year bond yield initially fell due to the 1995 rate cuts but later rose 27% from 5.52% in January 1996 to 7.05% in July 1996.

Conclusion:

• The increasing risks of a soft landing and inflation continue to weigh on the TLT ETF. The bond market needs rising recession risks to reignite expectations for rate cuts.

• While I recognize the benefits of bonds in a portfolio, I prefer stocks ( $SPDR S&P 500 ETF Trust(SPY)$ , $iShares Core S&P 500 ETF(IVV)$ , $Vanguard S&P 500 ETF(VOO)$ , $Invesco QQQ(QQQ)$ ) over bond during this earnings season, as I anticipate more earnings surprises.

• So far, 37% of S&P 500 companies have reported their Q3 2024 earnings, with 75% showing a positive EPS surprise.

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