When looking at the iShares 20 Plus Year Treasury Bond (TLT) exchange-traded fund (ETF), one of the first points to consider is whether interest rates are likely to go up or down in the foreseeable future. The relationship between Treasury bond yields and interest rates is the key to its performance.
Generally speaking, if you expect that interest rates will rise in the future, it is best to avoid long-term bonds such as those that are tracked by the TLT. If that happens, you're locking ina lower interest rate.
If you believe interest rates will fall, then it makes sense to invest in a long-term bond fund like the TLT.
To start, let’s look at TLT’s key metrics.
Key Metrics of TLT ETF
- Purpose: Tracks the Barclays U.S. 20+ Year Treasury Bond Index.
- Inception date: July 22, 2002
- 30-day average volume: 24,825,175
- Expense ratio: 0.15% (very low)
- Year-to-date performance: 4.08%
- 1-year performance: -7.82%
- 3-year performance: 12.71%
All figures are as of June 30, 2023.
Economy and the Fed
Interest rates in the U.S. had been historically low ever since the 2008-2009 financial crisis. But in the wake of the COVID-19 pandemic, inflation began to hit hard, jeopardizing the economy and harming millions of American consumers.
The Federal Reserve responded by raising interest rates in a series of actions that began in March 2022. Rates were raised 11 more times over the following 18 months. As of August 2023, the Fed was not promising it wouldn't raise rates again in order to achieve its goal of 2% inflation.
Inflation and Treasury Bond Rates
The impact of interest rate increases can be seen clearly in Treasury bond rates. The 10-year Treasury rate sank as low as 0.64% in mid-July 2020. On Aug. 14, 2023, the rate stood at 4.26%.
Those who want to invest in bonds might well consider high-quality short-term government bonds. U.S. bonds are likely to be a sound bet, short- or long-term.
Bond investments also have liquidity, opening up possibilities for action if economic circ*mstances change. For example, if stocks tank, the bond investor has the option of cashing out in order to buy stocks at big discounts.
The above analysis is a macro perspective. It’s impossible to time the market, but it’s relatively easy to predict long-term results based on logic and trends.
Are Treasury Bonds a Good Investment?
Treasury bonds have some real strong points. They are as safe as an investment can be, given that they are backed by the full faith and credit of the U.S. government. They are small-investor friendly, being issued in denominations as little as $100. They are exempt from taxes, too.
That said, Treasury bonds pay a relatively modest interest rate, even compared to some corporate bonds. So, you might not get rich but you won't go broke investing in Treasury bonds.
Can I Buy Treasury Bonds Directly?
You can buy Treasury bonds directly from the U.S. Treasury at TreasuryDirect.gov. The site allows purchases of savings bonds, 10-year notes, and 30-year bonds.
Treasury bonds also are sold by banks and brokerages.
What Other Types of Bond ETFs Are There?
There is a wide variety of bond ETFs available. Like most ETFs, the funds track a specific bond index or other benchmark.
An investor might choose an investment-grade corporate bond ETF to get the slightly higher yield that these offer compared to U.S. Treasuries.
An investor who has a higher risk tolerance might choose a bond ETF that contains some higher-yield bonds, otherwise known as junk bonds.
The Bottom Line
TLT is a high-quality ETF, thanks to a low expense ratio and liquidity. It should present a decent investment opportunity in the near future due to low-interest rates which drive up the price of bonds, but it’s probably not the best place to be over the next few years. Consider short-term high-quality short-term government bonds, the U.S. dollar, and best of all cash.
Dan Moskowitz does not have any positions in TLT. He is currently long in FAZ, TECS, DRR, and BIS.
FAQs
Conversely, if you hold the belief that interest rates will decrease, then investing in an ETF like TLT would be a logical choice. Taking a long position on TLT means betting that the long-term interest rates will decline, which would increase the price of the bond ETF.
Is TLT a good investment now for long-term? ›
With a 30-day SEC yield of approximately 4.5%, and short-term ETFs yielding as much as 5% with less interest-rate risk, TLT is not an ideal investment to hold for its income-generating qualities.
What is the effective duration of the TLT? ›
This is why long bond ETFs like TLT can see stock-like returns in a falling rate environment. The TLT portfolio's effective duration is 16.5 years.
What is the prediction for TLT? ›
TLT Signals & Forecast
On further gains, the ETF will meet resistance from the short-term Moving Average at approximately $90.50. On a fall, the ETF will find some support from the long-term average at approximately $89.90.
Is TLT better than buying bonds? ›
TLT - Performance Comparison. In the year-to-date period, BOND achieves a -0.83% return, which is significantly higher than TLT's -7.93% return. Over the past 10 years, BOND has outperformed TLT with an annualized return of 1.70%, while TLT has yielded a comparatively lower 0.13% annualized return.
Does TLT pay monthly dividends? ›
TLT Dividend Information
TLT has a dividend yield of 3.88% and paid $3.51 per share in the past year. The dividend is paid every month and the last ex-dividend date was May 1, 2024.
What is the Vanguard equivalent to TLT? ›
VGLT Long-Term Treasury ETF.
What is the TLT strategy? ›
Strategic TLT Buying Amid Market Cycles
TLT, or Ishares 20+ Year Treasury Bond Etf, is an exchange-traded fund that tracks the performance of long-term US Treasury bonds. The "buy the dips" strategy involves purchasing TLT when its price experiences a temporary decline or dip in value during bearish market cycles.
How is TLT taxed? ›
The taxes involved for TLT investment returns include: Dividends: The dividends paid by TLT are usually treated as ordinary income or may be treated as qualified dividends, requiring dividend tax payment. Capital Gains: If TLT is sold at a price higher than the purchase price, capital gains are generated.
Why are longer duration bonds good? ›
If an investor expects interest rates to fall during the course of the time the bond is held, a bond with a longer duration would be appealing because the bond's value would increase more than comparable bonds with shorter durations.
TLT IV Percentile Rank
TLT implied volatility (IV) is 12.5, which is in the 10% percentile rank. This means that 10% of the time the IV was lower in the last year than the current level. The current IV (12.5) is 3.5% above its 20 day moving average (12.0) indicating implied volatility is trending higher.
Does TLT yield change? ›
When the market expects inflation to increase, TIP/TLT ratio would rise as well. Since CPI data releases are subject to delay, TIP/TLT can serve as a leading indicator for inflation outlook. Long-term bond yield is also reflective of future inflation, so it rises as TIP/TLT increases.
How does TLT fund work? ›
The TLT ETF works by tracking the performance of long-term U.S. Treasury bonds, providing investors with exposure to the long end of the yield curve. It aims to replicate the performance of the ICE U.S. Treasury 20+ Year Bond Index.
Is TLT a long term investment? ›
TLT is centered on extended-duration U.S. treasuries. The ETF allocates its investments to U.S. treasuries, featuring a weighted average maturity period of approximately 26 years.
What is the average duration of TLT? ›
For more information on Aggregate Cash Flow Yield, see info here.
| As of 05/28/24 |
|---|
| Price | $90.07 |
| ACF Yield to Worst ACF Yield to Maturity | 4.73% |
| Modified Duration | 16.34 years |
| Spread of ACF Yield (4.73%) over 30.00 yr Treasury Yield (4.66%) As of 05/28/24 is + 8 bps |
1 more rowThe "TLT" fund tracks longer-duration Treasurys, a segment hit hard by the Federal Reserve's sudden shift in 2022 away from more than a decade of ultra-low interest rates. To underscore the damage to bonds, cumulative returns for TLT since March 2020 were negative 38.3%, according to the latest FactSet data.
What is the best bond ETF for 2024? ›
Top Bond Indices 2024
- iBoxx® MSCI ESG USD Asia ex-Japan High Yield Capped (EUR Hedged) 2024: +11.71% ...
- ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus. 2024: +7.10% ...
- iBoxx® USD Breakeven 10-Year Inflation. 2024: +6.37% ...
- Bloomberg China Treasury + Policy Bank (USD Hedged) 2024: +6.12%
7 of the Best Long-Term Stocks to Buy
| Long-Term Stock | Forward Dividend Yield |
|---|
| Dover Corp. (DOV) | 1.1% |
| Abbott Laboratories (ABT) | 2.1% |
| Chubb Ltd. (CB) | 1.4% |
| Chevron Corp. (CVX) | 4.2% |
3 more rowsMay 24, 2024
What to consider now. We suggest investors consider high-quality, intermediate- or long-term bond investments rather than sitting in cash or other short-term bond investments. With the Fed likely to cut rates soon, we don't want investors caught off guard when the yields on short-term investments likely decline as well ...
What is the best 10 year Treasury ETF? ›
Here are some examples of top 10-year Treasury ETFs, as measured by assets under management:
- iShares 7-10 Year Treasury Bond ETF (IEF)
- Vanguard Long-Term Treasury ETF (VGLT)
- Schwab Long-Term US Treasury ETF (SCHQ)
- SPDR Portfolio Long Term Treasury ETF (SPTL)
