TLT - TLT: Bonds Offer Favorable Odds Now

2024-06-18 12:58:53 ET

Summary

• TLT offers exposure to long-term U.S. Treasury bonds with extended duration.
• TLT provides a favorable return/risk profile under current conditions.
• The current inflation data and future contracts both point to lower rates.
• Other catalysts like fiscal sustainability and rate cap can lead to even deeper rate cuts.

TLT ETF and inflation data

The thesis of this article is pretty straightforward. I will argue that long-term treasury bonds such as those held in iShares 20+ Year Treasury Bond ETF ( TLT ) now provide an asymmetric return/risk profile due to both near-term and longer-term catalysts. The key near-term catalyst is cooler inflation. The latest consumer price index data, reported by the U.S. Labor Department on June 12, showed no increase in May 2024, suggesting that inflation has loosened its stubborn grip. More specifically, as shown in the chart below:

The consumer price index held flat in May though it increased 3.3% from a year ago. Both numbers were 0.1 percentage points below market expectations. Excluding volatile food and energy prices, core CPI increased 0.2% on the month and 3.4% from a year ago, compared with respective estimates of 0.3% and 3.5%. Price increases were held in check by a 2% drop in the energy index and just a 0.1% increase in food.

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