NYSEARCA:TLT – Is This the Perfect Time to Buy Long-Term Treasury Bonds?
The iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) has become the center of attention as investors weigh its potential amid shifting economic conditions. With long-term yields fluctuating and recession fears creeping back into the market, many are asking: Is TLT still a strong buy, or is the risk of high rates too great to ignore? At a current price hovering around $92.44, TLT remains a battleground for bulls betting on rate cuts and bears fearing prolonged higher interest rates.
Economic Slowdown and TLT’s Growth Potential
The latest economic data signals a weakening growth environment, which could favor TLT’s price performance. Consumer confidence has dropped to 98.3, well below expectations of 102.5, marking its biggest decline in four years. Personal spending has turned negative, falling by -0.2%, while jobless claims have jumped to 242K from a forecasted 221K. With the GDP growth rate slowing to 2.3% from 3.1%, concerns about a cooling economy are gaining traction. These trends align with a historical pattern where falling economic momentum increases demand for long-duration bonds, pushing TLT higher.
At the same time, core PCE inflation—a key metric for the Fed—has fallen to 2.6%, down from 2.9%, bringing the central bank closer to its 2% inflation target. Historically, declining inflation supports lower yields, which is bullish for TLT. However, the market remains uncertain about the timing of rate cuts, as Federal Reserve officials continue to signal caution.
The Yield Curve is Flashing Recession Warnings
Treasury yields have dropped significantly, particularly at the long end of the curve, indicating a potential shift in market sentiment. The 10-year Treasury yield has fallen to 4.29% from 4.52% a month ago, while the 30-year yield now sits at 4.56%, down from 4.76%. These movements reflect increased recession discounting, as investors anticipate an economic slowdown that would force the Fed to ease monetary policy.
Interestingly, the biggest declines have been seen in the 5-year and 7-year yields, which fell by 17 and 16 basis points, respectively, in the past week alone. This suggests that investors are positioning for a near-term slowdown rather than just pricing in long-term structural changes. If the market is correct, TLT could see significant upside as investors rush into longer-duration bonds to hedge against economic uncertainty.
Does the Federal Reserve’s Neutral Rate Suggest Higher for Longer?
Despite falling inflation and a slowing economy, there’s a growing concern that the neutral rate of interest (r-star) may be higher than previously assumed. The neutral rate is the level at which the Fed’s policy rate neither stimulates nor restricts economic growth. Some estimates place the real neutral rate at 1.26%, meaning the nominal neutral rate could be above 4%, which is near today’s Fed Funds rate of 4.33%.
If this higher neutral rate holds, it suggests that long-term rates may not decline as much as TLT bulls hope, making it harder for the ETF to stage a strong rally. The Fed’s latest projections show a longer-run policy rate of 3%, implying that rates could remain elevated for years.
Mortgage Refinancing as a Hidden Bullish Catalyst for TLT
A lesser-discussed but crucial indicator for bond performance is the mortgage refinance index, which reflects homeowners’ ability to refinance debt at lower rates. Historically, when refinancing activity picks up, it forces mortgage-backed securities (MBS) investors to hedge by buying more long-duration Treasuries, increasing demand for TLT.
While the MBA mortgage refinance index dropped from 593.6 to 572.5 last week, this decline is likely temporary. If Treasury yields continue to fall, a spike in mortgage refinancing could further push long-term bond prices higher, giving TLT another tailwind.
Buy, Hold, or Sell? What’s the Best Move for TLT Investors?
With TLT trading at $92.44, investors face a key decision: Is this a buying opportunity before a Fed-driven bond rally, or does the risk of higher-for-longer rates warrant caution?
The bull case for TLT remains strong if the economic slowdown deepens and inflation continues to decline, pushing the Fed toward rate cuts. A steepening yield curve and increased recession discounting suggest that the bond market is already positioning for lower rates, making TLT an attractive hedge against economic uncertainty.
However, if the neutral rate remains elevated and the Fed delays rate cuts beyond 2025, TLT could struggle to gain momentum. The risk of prolonged high interest rates exposes long-duration bonds to capital losses, especially if inflation reaccelerates or the economy avoids recession.
Verdict: TLT remains a high-risk, high-reward bet. If economic conditions deteriorate, the ETF could easily rally toward $100 or higher. But if the Fed holds rates steady longer than expected, TLT may stay under pressure in the short term. Investors should weigh these factors carefully before making a move.
