NASDAQ:TLT is an ETF that tracks value of United States Treasury Bonds in the time range of the 20-30-year bonds. With this ETF tracking the bond value it will rise with the decrease in these bond yields as the previous bonds offering higher % rates increase in value.
I am bullish on TLT for a few reasons that are summarized in the bullets below
- Interest Rates are at their highest levels in around 20 years and history would show that following these peaks in the 5.5%-7% range tends to be a sharp fall of interest rates usually due to a general moderate or severe economic downturn needing economic stimulus with low rates [These bonds will increase in value as the rate decreases]
- Along with the peak thesis, in the current economic state of America, it has been generally discussed by Fed Presidents that rate slowdown / rate hike pauses are starting. The FedWatch tool from CMEGroup shows that traders predict the highest rates will not go any higher, and actually start being cut in Early Spring 2024. Due to this data, it is definitely important to realize the risk/reward of this trade on how the downside is minimal with the current economic conditions proving interest rates will likely not move higher, and definitely not more than a last 25bps hike for this rate cycle considering no unprecedented events occur.
- Another staple to this bullish thesis is against the Federal Reserve. I strongly believe the Federal Reserve bluffs intentionally during their public conferences and talks. Recalling the inflationary period following COVID, the Fed repeatedly spoke out on this inflation being transitory while CPI rocketed to record highs in decades. I believe they like to not inform the public to the 100% truth and locked room talks. The Fed has came out and said they are quite against publicizing a rate pause officially / begin cutting rates and I believe this is a bluff. As the Fed claims to wait for data, I believe that data is showing, and will continue to show stronger economic struggle from the effects on high-interest rates. As unemployment just ticked up and probably will continue, rates will start to drop fast as soon as the Fed starts. Treasury Yields would likely dump prior to all of this as the anticipation begins to flow into the markets. Lastly, I think the Fed tends to deceive the public to try and not heavily move the markets in a short time.
- Overall the data should start to pour in on economic slow down as student loan repayments resume, credit delinquencies continue to rise, housing market cools, unemployment ticking up, and more can feed to a sharp drop in CPI as aggregate US demand settles. The Fed will act on this slowdown and will need to sharply cut interest rates, especially if they wait too long.
- Technicals on NASDAQ:TLT also look strong with a major demand zone, a dailydouble bottom and a diagonal trendline supports the price level. TTM_Squeeze also backs up a possible end to the downside. Below 89 area could be a solid Exit area for risk-management.
Any Cut in Rates, or anticipation in rate cuts can send TLT flying with bond yields tumbling.
Bonus: NASDAQ:TLT also provides a safe hedge to a market collapse or recession. Because market recessions would spark a cut in rates to help fuel a recovery, while stocks may tumble, this ETF would rally on a decline of interest rates to help stimulate a falling economy.
Thesis : long Commons or 2025 dated Credit Spreads
Trade active
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Rough bumpy start but wow! Has this thing taken off or what!
I will be remaining LONG in this position as a hedge to a recession and rate cuts
you can take a look at the ETF fund flows and see that demand is increasing as we near the bottom. another bullet point that I think you would add is that there is a large discrepancy between hedge fund shorts on treasuries versus large institutions going long treasuries. this could unwind quickly in the event of yields dropping which would further the bullish thesis but this also plays into the idea that the Fed doesn't want to disturb markets.
ZachSap
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@Franknewman Thanks for that. Good addition for sure. Agreed
Franknewman
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@ZachSap one more thing I forgot to add is the next treasury direct auction for the 10-year and the 30-year are next week and last time they did those auctions we got the price dumped on because the FED has increased their auction sizes significantly and so I think we will see our best prices next week assuming we get a pause from the fed the next week on the 19th and 20th
ZachSap
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@Franknewman Price dumped on TLT? Or the bond yields. You mean heavy demand on the yields so TLT pumps? and yields fall?
Franknewman
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@ZachSap I mean the fed is selling lots of treasuries, more than usual so the price of treasuries\TLT goes down and yields go up in that situation. it happened last month around the same time the US was downgraded. but if the fed pauses a week later and hints at no more hikes there will be more demand and potential unwinding of shorts which is more demand, hence a potential pump in TLT. my two cents from a layman who is leveraged long in TMF like a psycho
ZachSap
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@Franknewman, lol, thanks just didnt know if it was the buy or sell side of those treasuries from the Fed. Thanks, appreciate it & GL!