TLT Volatile as Investors Weigh Revised GDP, PCE Report
Will PCE inflation data finally bring redemption to TLT investors?
The bond market has grown increasingly anxious this week as two U.S. government-debt auctions were met with weak demand ahead of key data from the Fed’s preferred inflation gauge due Friday.
Setting the stage in more dramatic fashion than usual this week, Treasury yields spiked to begin the shortened trading week, pushing prices down nearly 3%, as measured by the bond market proxy iShares 20+ Year Treasury Bond ETF (TLT).
TLT's price rebounded higher Thursday as investors weighed a report from the Bureau of Economic Analysis (BEA) that revised Q1 real gross domestic product (GDP) growth to 1.3%, a lower figure than the first estimate of 1.6%.
When the BEA releases the April Personal Expenditures Price Index (PCE) report Friday morning, long-term bond investors will be watching and hoping for signs that inflation has resumed its path down toward the Fed’s 2% target.
The Cleveland Fed’s “Nowcast,” which follows a set of real-time estimates for various inflation metrics, currently predicts a monthly increase of 0.10%, down from 0.3% in March, and a yearly increase of 2.7%.
If these forecasts hold, Friday’s PCE inflation data could provide some temporary relief for battle-tested TLT investors, but if there’s any surprise to the upside, bond prices may resume their decline.
TLT’s Volatile Price History
TLT’s price has a volatile history. It was just seven months ago that the three-year bear market for bonds ended as Treasury yields retreated and prices resumed their long-awaited climb.
By late October, TLT had fallen a brutal 50% from its July 2020 peak. From the October trough, TLT climbed over 20% to end 2023. This year, TLT’s price has retreated 10% as inflation has remained higher for longer than expected.
But it’s this volatility that is reflected in TLT’s interest rate sensitivity, which is the reason many investors have been attracted to the long-term Treasury bond ETF. When interest rates are falling, or the market expects them to fall imminently, bond prices will rise, and the longer the duration of a bond, the greater the price appreciation.
Thus, for many investors, investing in TLT is a bet that inflation will cool as the economy slows, providing sufficient support for the Federal Reserve to cut interest rates.