TLT - ZROZ: Likely To Rise Significantly Through 2025

2024-01-31 09:31:26 ET

Summary

• Long-term Treasury ETFs like ZROZ have the potential to outperform equities and commodities due to a disinflationary downcycle and a significant decline in yields.
• The behavior of the yield curve suggests that long-term yields will fall over the course of the next two years, benefiting long-duration Treasuries.
• Relative performance metrics currently show underperformance of ZROZ, but it will likely beat the S&P 500 and commodity ETFs as yields fall.
• Excessive federal debt is a concern, but there is no clear link between rising debt and rising yields.
• Using absolute and relative momentum and trend metrics can help prevent the risks of a debt crisis and the chronic underperformance of Treasuries relative to equities.

A year ago, I argued that long-term Treasuries would be the likely ‘ winner ’ in 2023. In the end, the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF ( ZROZ ) gained 1% last year and beat the Invesco DB Commodity Index Tracking Fund ETF ( DBC ) by 8% but underperformed the S&P 500 ( SPY ) by a whopping 20%. Yet, there is still an elevated probability of long-term Treasuries outperforming other major asset classes—equities and commodities—this year and well into 2025. This is because we seem to still be in a disinflationary downcycle, and it is likely that the inverted yield curve points to a significant and sustained drop in yields from their current levels.

Such a decline would primarily benefit long-duration Treasuries relative to short-term Treasuries, as well as commodities, and also increase the probability of an outperformance relative to broad equity indices like the S&P 500. This points to a strategy of leaning into Treasuries and, specifically, the long end of the curve, particularly long-term Treasury ETFs like ZROZ....

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