TLT has broken out and should continue higher

iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is finally breaking out and hitting a higher high for 2024. TLT shares are appreciating along with underlying Treasuries ahead of the upcoming cycle of rate cuts and lower levels. of inflation. TLT shares are now in the triple digits and look set to trend higher for most of the rest of 2024, and continue to be higher in 2025.

Long-term Treasuries provide a steady stream of income through their interest payments, and Treasuries cannot be called back by early redemption like most competing bonds and CDs. Treasuries are also some of the best-rated securities available because of their express U.S. government guarantee, which is backed by the ability to tax and print dollars. Alternatively, most investments are not permitted by law to include such a guarantee.

In 2022 and 2023, the Federal Reserve aggressively raised interest rates to combat inflation, pushing up yields on fixed-income instruments like Treasuries. When yields rise, the valuation of existing fixed income assets falls. The aggressive nature of the Fed’s rate hikes is causing a serious decline in Treasury valuations. These declines compromised some bank balance sheets and contributed to their failure. Certain commercial real estate markets have also been seriously affected.

We are now on the cusp of the Federal Reserve cutting interest rates through a series of rate cuts, with most expecting the first such rate cut to take place this month. Lower rates should have the opposite effect on Treasury valuations, though primarily at short- and medium-term maturities. However, when shorter-term rates fall, competing fixed incomes will follow. Government agency debt is also likely to be subject to aggressive early redemption because it is repayable. The result is that long-term Treasuries become considerably more attractive.

Bonds also balance the risk of equity investments in a portfolio and are often held for their hedging ability. This is because higher-rated bonds often do well when equity markets decline. This inverse relationship did not appear to hold for most of the last decade, which was likely due to the already extremely low interest rates that fixed income offered. Now, however, it seems more likely that high-quality credit will act as a hedge against falling stocks.

Global economic uncertainty is another reason to expect Treasuries to remain strong in the near term. In particular, markets should be concerned about rising geopolitical tension and the potential for a continued slowdown in Asian economies, particularly China. Investors may want the safety and stability of Treasuries should such conditions continue or worsen.

Treasuries have now hit their highest valuation since 2024 and appear to be trending higher with interest rates cut and potential weakness in capital markets. Last month, TLT rose with a broad market decline and an increase in volatility. TLT subsequently sold off a bit as volatility calmed down and the market rallied, but TLT has recovered all of that so far only in the first week of September.

The TLT 2024 chart also shows a well-rounded pattern of lows over the past eight months and is now above the level it reached last month and also at the end of 2023. Once TLT broke through this level, which acted as strong resistance in the past, it could quickly turn to a support level. I think such an outcome is very likely at the start of the rate cut cycle.

Additionally, there is strong potential for TLT growth to accelerate along with rate cuts and possible market weakness. This would be especially the case if the market suffered such weakness that the Federal Reserve would be forced to cut rates at an even more aggressive pace than anticipated. While I don’t think the Federal Reserve is likely to move aggressively before the presidential election, it may become more aggressive after the fact.

While TLT did not finish the week above $100, it remained extremely close, and this weekly closing price is a higher high for the year. Also, both this week and last week, bonds sold off near the close. Prices could end up staying close to $100 for the next two weeks as they await the Federal Reserve’s final decision on whether to initiate the rate cut cycle and also whether to do so with a 25 or 50 basis points. Any further weakness is likely both a short- and long-term buying opportunity.

risks

Long-term Treasuries come with various risks, and the main risk is interest rate risk. When interest rates rise, as they did in 2022 and 2023, the price of existing bonds will fall. Moreover, such interest rate risk is increased by the duration of a bond, where the change in interest rate is multiplied by their duration, so it is higher for longer maturities.

Another risk to long-term bonds is opportunity cost. Treasuries are not expected to perform in line with equities over the long term, so locking up capital in long-term bonds can come at the expense of lost opportunities to allocate to better-performing alternatives.

Treasury investments also face the risk of a weaker dollar and higher levels of inflation in the future. Lower interest rates are generally associated with a weaker dollar. Rising inflation rates would force the Federal Reserve to raise interest rates to strengthen the dollar, which is bad for Treasury ratings.

Conclusion

TLT finally broke through the $100 level. Although it did not hold that level until the weekly close, it broke out and held a higher weekly close for 2024. While TLT may not advance higher smoothly, this move is a show of strength that is likely to set up a further appreciation. . It’s also impressive that TLT managed to reach this level before the Federal Reserve’s prime rate cut.

TLT looks set to continue appreciating in the final months of 2024 and into 2025 as the Federal Reserve effectively cuts rates. TLT’s current level is likely to turn from resistance to support for another move up during the start of the rate cut cycle, which should take place later this month.