The iShares 20+ Year Treasury Bond ETF (TLT) fell 0.75 percent on March 17 and opened lower on March 18. It has lost over 14 percent YTD but has risen at a CAGR of 6.4 percent over the last 10 years. What’s the forecast for TLT? Is it a good investment despite the recent weakness?
So far, 2021 hasn’t been a good year for bond investors. Bond yields and prices are inversely related. When bond yields rise as they have risen in 2021, bond prices fall. This leads to capital loss for investors who are invested in these bonds.
TLT is an ETF
TLT is an ETF that invests in U.S. government Treasuries. U.S. government Treasury bonds are regarded as one of the safest investments globally. The basic premise is that the U.S. government wouldn't default on its obligations, especially when they are priced in the U.S. dollar.
TLT ETF explained
TLT invests in U.S government Treasuries that have a remaining maturity of over 20 years. As of March 17, the ETF had a weighted average maturity of 26.17 years. Given its maturity profile, TLT is riskier compared to ETFs that invest in bonds with lower maturity. Long-dated bonds are more sensitive to changes in interest rates than short-term bonds.
As of March 17, the ETF had an effective duration of 18.42 years. The effective duration measures the risk of a bond and measures the sensitivity of the bond to changes in interest rates. The ETF has a weighted coupon of 2.74 percent with an average yield to maturity of 2.40 percent.
TLT's stock price
TLT was trading 1.35 percent lower at $133.47 when the market opened on March 18. The ETF has a 52-week trading range of $133.29–$172.25. TLT hit its 52-week low on March 18 and is now down 22 percent from its 52-week highs. TLT is in a bear market territory since it has fallen over 20 percent from its highs.
TLT pays a dividend.
U.S. government Treasury bonds pay interest on a semi-annual basis. TLT declares dividends frequently. It has declared two dividends so far in 2021 and the most recent dividend was paid on March 5.
TLT's stock forecast
TLT's forecast depends on your view of bond yields. The yields on U.S. government bonds have come off after Fed Chair Jerome Powell reassured markets that the Fed won't raise rates quickly. The Fed hinted that the rate hike wouldn't happen before 2024 even though it expects U.S. inflation to rise to 2.4 percent in 2021.
Fed Projections— Charlie Bilello (@charliebilello) March 18, 2021
GDP Growth: 6.5% in 2021, 3.3% in 2022, 2.2% in 2023.
Unemployment: 4.2% in 2021, 3.9% in 2022, 3.5% in 2023.
Inflation: 2.4% in 2021, 2.0% in 2022, 2.1% in 2023.
Policy: No change in 2021 (0% rates), No change in 2022 (0% rates), No change in 2023 (0% rates).
Rising inflation is negative for bonds since it prompts the central banks to raise rates. However, since the Fed moved to average inflation targeting in 2020, it won't raise rates as soon as the inflation crosses above 2 percent and will wait for it to average 2 percent.
Buying TLT depends on movement in yields.
You can buy TLT now if you are of the view that the yields on U.S. government bonds aren't going any higher from here. While there's a school of thought that bond yields have a lot of room to run higher, many others think that yields will eventually fall since the Fed isn't in a mood to spoil the party with its rate hikes.