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Last year’s hottest bond ETF is plunging—whacking investors who misjudged inflation.
Like most bond funds, the iShares 20+ Year Treasury Bond ETF (TLT) fell to fresh 2024 lows on Wednesday following the release of an unexpectedly hot Consumer Price Index for March. The interest rate sensitive fund dropped 1.3%.
On a year-to-date basis, TLT is now down 7.1%, erasing its gain of 2.8% from last year and then some.
It’s a striking decline for an ETF that was among the most popular of 2023. Investors added a whopping $24.8 billion to TLT last year—the most of any fixed income ETF—on expectations that the Fed would vanquish inflation and rates would swiftly decline.
Read More: The Best ETFs for Inflation in 2024
Heading into 2024, those assumptions were looking good. Growth in the core personal consumption expenditures price index—the Fed’s preferred measure of inflation—had decelerated sharply, even falling below 2% on a six-month basis.
The core consumer price index was running a bit higher, but it too was headed in the right direction.
Encouraged by that data, investors priced in six full fed rate cuts for 2024 at the start of the year, while the 30-year Treasury bond yield briefly fell below 4%.
Inflation Perks Up
Quickly, however, investors began to realize that the path for inflation wouldn’t be a straight line down.
Consumer prices rose faster than expected in January, February and March.
For three straight months, the core CPI grew by 0.4% on a month-over-month basis, an annualized rate of nearly 5%.
Meanwhile, the core PCE, which puts less emphasis on shelter costs, increased by 0.4% in January and 0.3% in February—consistent with inflation in the 4% range (the data for March will be released on the 26th).
These numbers have returned inflation worries to the forefront, causing investors to reevaluate when, or even if the Fed will cut rates this year.
Following Wednesday’s CPI release, the pricing of fed funds futures indicated that there is an 80% probability that the Fed will hold rates steady at its June meeting, while there is a 55% probability that it keeps rates on hold in July.
The futures market now expects only two rate cuts this year, less than even the Fed was projecting in its last Summary of Economic Projections from March.
Some are even abandoning the possibility of rate cuts altogether. Minneapolis Fed President Neel Kashkari said last week that the central bank might not need to cut rates if inflation stays elevated and the economy remains strong.
While certainly not the consensus view, fed funds futures are pricing in an 11% probability of no rate cuts this year.