Why TLT ETF Is Crashing (Fully Explained)

Summary

In this analysis of the TLT ETF and the bond market, the speaker discusses recent trends influenced by the upcoming U.S. presidential election and China's economic stimulus. With rising inflation expectations and a sell-off in bonds, the real rate of return suggests that bonds are currently undervalued. However, the potential for a recession and the need for additional federal debt issuance raise questions about future bond prices. The commentary highlights the relationship between stock market performance and bond attractiveness, underscoring the complexity of the current financial landscape.

Takeaways

• 📈 The recent weakness in the TLT ETF and the bond market is linked to rising expectations for a Trump victory in the upcoming US election.
• 🏦 The bond market sell-off has been significant, with the 20-year Treasury yield rising from 4% to 4.4%.
• 💰 A key indicator for bond attractiveness is the real rate of return; currently, it stands at about 2.1%, which is considered cheap historically.
• 🔍 Negative real rates from 2022 to 2023 made holding bonds risky, but current conditions suggest they may now be undervalued.
• 💵 The US public debt has reached nearly $35 trillion, necessitating $1.5 trillion in annual borrowing to maintain bond prices.
• 🌍 Central banks have started printing money again, but the stimulus levels are not sufficient to support the growing federal deficits.
• 📊 The stock market has increased in value, with a potential 5-6% sell-off needed to redirect capital into bonds.
• 📉 The markets are fluctuating between fears of recession and optimism, affecting bond and stock valuations.
• 🔗 The likelihood of recession has decreased recently, impacting the pricing of federal funds rates.
• 🧐 There are currently no strong fundamental reasons to buy bonds other than as a hedge against potential recession.

Q & A

What recent event is influencing the bond market according to the transcript?

The upcoming US presidential election and the increasing strength of Trump's polling numbers are influencing the bond market.

How does Trump's potential victory affect expectations for the bond market?

A Trump win is expected to favor a stronger stock market and a weaker bond market due to his rhetoric on tariffs and labor.

What role is China's economic stimulus playing in the current bond market situation?

China's significant economic stimulus, amounting to hundreds of billions of dollars, could lead to rising inflation expectations, impacting global bond prices.

What has been the trend in interest rates for bonds recently?

Interest rates for bonds have increased, with the 20-year treasury yield rising from 4% to 4.4%.

What indicator is used to assess whether bonds are cheap or expensive?

The real rate of return for bonds is used as an indicator; currently, it is around 2.1%, which is generally considered attractive.

What historical context is provided regarding negative real rates of return on bonds?

From 2022 to September 2023, there were negative real rates of return, meaning inflation was higher than bond yields, making holding bonds risky.

What is the current status of US federal debt and its implications for bond investors?

US federal debt has reached nearly $35 trillion, and annual deficits of $1.5 trillion require continuous bond purchases to maintain prices.

What do recent central bank activities indicate about the bond market?

Recent central bank activities show a slight increase in money printing, but it's insufficient to cover the extensive federal government spending.

How might a stock market downturn influence bond prices?

A stock market sell-off could lead to a reallocation of funds into bonds, potentially driving bond prices higher.

What overall conclusion can be drawn about the bond market's future based on the transcript?

While bonds are currently undervalued and may appreciate if a recession occurs, there are no strong fundamental drivers for a significant rally at this time.