During the September meeting, the Federal Reserve held interest rates
steady, with Fed members saying the central bank could keep rates elevated
for much longer than previously expected. The Fed maintained its forecast
for another rate hike by year end and reduced the number of rate cuts
expected in 2024 to two from four previously.
The Federal Reserve has raised its key interest rate 11 times since March
2022, taking it to a targeted range of 5.25%-5.5%. Since the September
meeting, the 20-Year Treasury yield has risen about 0.25%, in effect
pricing in the rate increase policymakers indicated then.
The higher for longer message from the Fed triggered a massive sell off in
bond markets, sending the 20-Year Treasury yields higher to a 16-year high
of 5.25% last week. Higher yields tighten financial conditions and threaten
to curb growth, thus helping the Fed to tame inflation.
The surge in U.S. treasury yields has sparked much anxiety among investors,
given expectations that interest rates have finally peaked. Following the
sharp rise in yields throughout September, earlier this week several Fed
members have adopted more dovish tone on further rate hikes, causing a pull
back to 4.87%.
Source: TradingView, 20 Year Treasury Yields
On Wednesday the Federal Reserve released the minutes of the Federal Open
Market Committee (FOMC) meeting that was held on the 20 th of
September 2023. The document noted that all members of the rate-setting
FOMC agreed they could “proceed carefully” on future decisions, which would
be based on incoming data.
A point of complete agreement was the belief “that policy should remain
restrictive for some time” until the FOMC is confident that inflation is
moving towards its goal. A number of members commented that, with the
policy rate likely at or near its peak, the focus of monetary policy
decisions should shift from how high to raise the policy rate to how long
to hold the policy rate at restrictive levels.
While the meeting decided against a rate hike, in the dot plot of
individual members’ expectations, two-thirds of the committee indicated
that one more increase would be needed before the year end.
U.S. Treasury yields rebounded strongly on Thursday after data showed U.S.
consumer prices increased more than expected in September, which
underpinned the views of some Fed members that U.S. interest rates may need
to remain higher for longer.
It appears that most probably there is not enough in the CPI report to
suggest that the FOMC may need to tighten policy in November; however, the
higher readings justify the message that policy needs to remain tighter for
longer, with the prospect of another rate hike still being kept on the
table. Following Thursday’s consumer prices report futures markets suggest
a 40% probability of a U.S. rate increase in December, compared with a 28%
chance seen before the report.
Source: TradingView, iShares 20+ Year Treasury Bond ETF
The iShares 20+ Year Treasury Bond ETF (TLT), which is a proxy for the
long-term Treasury bond market, reached a low of $84.06 on Friday – its
lowest price level since 2007. While at this point still there is no clear
reversal signal evident on the chart, TLT has attracted a record $17.6
billion so far this year in a high conviction bet that interest rates are
near a peak and prices are near a bottom.
As bond yields move in the opposite direction of bond prices, investors can
use long-term Treasury bond ETFs like TLT to capture significant price
appreciation once interest rates start to decline.
With yields on the 20-year Treasury note around the 5% mark at present,
investors’ appeal to high interest distributions amid the prospect for a
significant price appreciation once the economy slows down is undeniable.
With the current yield on the 20-year Treasuries of 5%, TLT’s risk/reward
ratio has become very attractive. A drop in interest rates of 50-basis
points from here would deliver a much greater return over the next 12
months, than the loss an unlikely 50-basis point rate rise would produce.
Investors are also optimistic that the U.S. is likely to enter a recession
in 2024, which in turn should exert downward pressure on yields. Lower
yields would send long end bond prices higher, as such TLT is seen as a
hedge against recession.
Leverage Shares
5x 20+ Year Treasury Bond
ETP tracks and provides magnified exposure to the performance of TLT.
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