The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) doesn’t have the prettiest chart when you look back at the past few years. The ETF has declined significantly due to the Federal Reserve’s record interest rate hikes, as inflation kept on climbing to decades-high levels. However, inflation has been more or less under control now, and even tariffs have not led to a meaningful increase in inflation.
The Fed is now pivoting away from a restrictive monetary policy and is becoming more dovish. Fed Chair Jerome Powell’s term will end in May 2026, after which a Trump appointee is expected to lead the Fed. This will presumably lead to even more aggressive cuts to a 3% terminal rate or less by late 2026.
Thus, the environment for long-term bonds has shifted from a headwind to a powerful tailwind.
I now believe the TLT ETF is the best one you can buy right now. Here’s why.
TLT has found a bottom, and could start going up
Interest rates have plateaued and have come down significantly. On the other hand, TLT has stopped declining and has been trading sideways. This ETF gives you exposure to long-duration U.S. government bonds by holding a portfolio that mirrors the ICE U.S. Treasury 20+ Year Bond Index.
Once shorter-term Treasury yields start slipping, these long-term bonds will see a lot more demand. Investors get hungry for yield once interest rate cuts narrow down the options for them to keep up with inflation by holding a safe, income-generating asset.
Since this ETF has exposure to long-term bonds, it will be one of the only few ways investors will be able to derive a 4%-plus yield if rate cuts continue.
In turn, TLT will likely start gaining.
It currently yields 4.42% and pays monthly. The expense ratio is just 0.15%, or $15 per $10,000.
One of the few assets that can gain from a recession
Almost every asset ends up losing during a recession. Even if your portfolio contains mostly defensive stocks, it is likely to go down significantly during a recession. There’s no avoiding losses in a broad-based downturn… or is there?
TLT is not an ETF that contains stocks. It focuses on high-yield bonds from the U.S. government, the safest asset available.
This characteristic has actually helped it during previous recessions. In 2008, TLT jumped from $90s range to over $122 in around a month. It quickly retreated back to normal prices before climbing back above $120 in 2012 and then $140 in 2016. The primary reason is that recessions usually invite aggressive interest rate cuts. A 2008-esque recession will likely lead to the same, as the government gets desperate to keep the economy’s gears turning.
Something very similar happened in 2020. Most assets fell by 20% to 30% in a matter of a few weeks, whereas TLT jumped by over 12% as the Fed reduced interest rates to near-zero levels.
Why TLT is the best bond ETF to buy now
TLT gets you a powerful hedge against recessions, and it is a must-have if your portfolio contains stocks that are vulnerable to a downturn. The Fed’s recent cuts were mostly due to slowing “job gains”. In fact, the U.S. lost 105,000 jobs in October before adding only 64,000 back in November. This is a telltale sign that an economic contraction may be close.
Plus, you get a reliable 4.42% yield with a monthly payout frequency. The fees are extremely low, and you also have solid long-term upside potential. TLT can only lose substantial value from here if interest rates increase. It is extremely improbable that interest rates will go up in this environment.
I only see further upside. If a bad enough recession hits, it could double if it recovers to 2020 levels. Or, if interest rates keep steadily going down, I’d expect 30% to 40% upside on top of the dividends in the coming years.
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