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Record Drawdown in Long-Dated Bond ETF Amid High-Interest Rates

EditorVenkatesh Jartarkar
Published 09/25/2023, 02:31 PM
© Reuters.

Monday saw the iShares 20+ Year Treasury Bond ETF (ticker NASDAQ:TLT), the largest long-dated bond ETF, experiencing a record drawdown due to the Federal Reserve's sustained high interest rates. The $39 billion fund has seen a 48% loss from its 2020 peak, marking its lowest trading point since 2011. Concurrently, short interest as a percentage of its shares outstanding has reached a month high, as per data from IHS Markit Ltd.

Investors are reshaping their strategies following the Fed's consistent message that interest rates will stay elevated for an extended period. Last week, the central bank reaffirmed that borrowing costs are anticipated to remain high in the coming year due to the robust U.S. economy. Predictions from 12 out of 19 officials also pointed towards a potential rate hike this year and fewer cuts than previously expected.

This environment has led to a significant increase in yields on long-term U.S. debt. The 30-year yield rose by up to 12 basis points to 4.64% on Monday, a level not seen since April 2011.

The rise in long-term Treasury yields can be traced back to early August when Fitch Ratings downgraded the U.S. credit rating and the Bank of Japan unexpectedly adjusted its policy. Zachary Griffiths, a senior fixed-income strategist at Creditsights, said these events among others have driven real yields higher.

Griffiths also linked the recent selloff to the September FOMC meeting decision, where policymakers projected higher economic growth in 2023 (2.1% vs. 1.0% in the June SEP) and interest rates to remain elevated for longer. Consequently, rates markets are factoring in fewer rate cuts over the next few years, pushing yields higher across the curve.

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TLT has fallen approximately 10% this year, following a 33% decline last year and a 6% drop in 2021. Other long-duration funds have also been affected, with the Vanguard Extended Duration Treasury ETF (EDV) down 14% in 2023, and the PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ) declining by over 15%.

Jonathan Krinsky, chief market technician at BTIG, noted that the bond trend is decidedly lower. He expects long rates to eventually decrease as the high-for-longer approach impacts the economy, which could lead to a simultaneous decline in rates and stocks, a phenomenon rarely observed this year.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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