TLT Slide Continues as Bond Market Reprices Fed Rate Cuts
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The long bond market proxy iShares 20+ Year Treasury Bond ETF (TLT) has dropped more than 11% since its 2024 high mark set two months ago, just before the Fed’s 50 basis-point rate cut.
Why is TLT going down, even as the Fed is actively cutting rates?
The short answer is renewed inflation concerns.
Since the Sept. 18 “jumbo” rate cut, fixed income investors have bid treasuries lower as economic reports suggest inflation is sticking around for a while.
Last week’s CPI report revealed that consumer prices rose 0.2% in October while the annual inflation rate edged up to 2.6% from 2.4%, marking its first rise in seven months, complicating decisions on the pace of future interest rate cuts.
Excluding food and energy, the so-called core inflation rate grew by 0.3% for the third straight month, reflecting persistent underlying price pressures.
The bond market is now pricing in a 60% probability that the Fed will cut rates by 25 basis points at its December meeting. That bet is down from 85% one month ago.
Digging Deeper: Why TLT’s Price Is Falling
The recent TLT ETF price decline can be attributed to several contributing factors:
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Economic outlook: Stronger-than-expected economic data can lead to expectations of a pause in Fed rate cuts, or even further rate hikes, which can negatively impact bond prices.
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Market sentiment: Changes in investor sentiment, such as increased risk aversion or concerns about economic growth, can lead to selling pressure on bond ETFs like TLT.
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Trump tariffs: President-elect Donald Trump made several promises on the campaign trail including tariffs on China and Mexico. Tariffs can lead to higher inflation, as they increase the cost of imported goods.
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Trump tax cuts: Tax cuts can stimulate economic growth by increasing disposable income and business investment. This can lead to higher inflation, as increased economic activity can put upward pressure on prices.
It's important to note that bond prices and yields have an inverse relationship. As bond yields rise, bond prices typically fall. Therefore, higher-for-longer inflation and expectations of a rate pause, or future rate hikes can contribute to a decline in the price of TLT.