What to Think About The Rally in a Popular Long-Dated Bond ETF
This article was originally published on ETFTrends.com.
Likely as a result of investors' leaning toward defensive assets late in 2018, the iShares 20+ Year Treasury Bond ETF (TLT) jumped 6.17% in December.
TLT's December bullishness has the exchange traded fund residing 2.49% above its 200-day moving average and just 4.41% below its 52-week high. The $8.45 billion TLT, which tracks the ICE U.S. Treasury 20+ Year Bond Index, has an effective duration of 17.38 years , meaning the fund is highly sensitive to changes in interest rates.
Short-term Treasury yields usually rise along with investor expectations for tighter Fed rate policies while longer-term yields are more sensitive to growth and inflation sentiment. Investors typically monitor the yield curve, or difference between long- and short-term yields, as an indicator for economic growth. The last time short-term rates exceeded long-term yields was before each recession since at least 1975, or something also known as an inverted yield curve.
TLT's December rally sets up some notable technical scenarios.
“TLT's takeout of its 320-day is impressive, given that this moving average provided stiff resistance during the latter half of January, and then proceeded to reject the bond ETF's July highs,” reports Schaeffer's Investment Research . “And investors are responding by shifting back into TLT; after steady outflows through the first half of December, a burst of inflows began on Dec. 18, ultimately yielding net inflows of $218.91 million for the month-to-date period.”
What's Next
While short-term bond ETFs were highly popular with fixed income investors last year, other data points indicate investors are renewing their affinity for TLT.
“Options data points to a similar burgeoning enthusiasm toward TLT. As of Friday, total put open interest had cratered to 561,340 contracts -- a figure that registered in just the 4th annual percentile, pointing to a remarkably slim presence on the part of put players. Comparable TLT call open interest -- at 703,157 contracts, in the 68th percentile of its annual range -- is considerably healthier,” according to Schaeffer's.
Despite the Fed's fourth interest rate hike of 2018 arriving in December, TLT posted a fourth-quarter gain of 3.62%. Some investors missed out on TLT's late-year bullishness as the fund saw fourth-quarter outflows of $1.66 billion.
For more trends in fixed income, visit the Fixed Income Channel .
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