Investors Just Poured Nearly $12 Billion Into This Battered ETF — and the Reason Could Surprise Wall Street
Billions keep flowing into a Treasury ETF that has lost ground for years, and the investors driving that trade are not the ones most people would expect.
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From July through mid-October, investors added $11.85 billion to the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT). That total includes a record $5.3 billion in August, according to Dow Jones Market Data reported by Barron’s. TLT kept falling while the money came in. Shares are down about 5% this year and roughly 9% over 12 months. The reason buyers keep coming back is math. TLT’s yield is now high enough that income finally gives holders a buffer against further losses.
Why a 5% Yield Changes the Math on TLT
TLT holds 47 Treasury bonds that mature in 20 years or more. It charges 0.15% a year and manages about $47 billion. Investors use it as portfolio anchor: it pays monthly income and usually rallies when the economy weakens.
Its price has fallen 34% over five years, and that decline is exactly why the 30-day SEC yield (a standardized measure of income after fund expenses) has reached 5.4%. Money arriving today locks in yields that 2021 buyers never got. Some of that money is tactical. Second-quarter 13F filings (quarterly holdings reports that large money managers file with the SEC) show Two Sigma, Renaissance Technologies, and Point72 opening new positions. Hedge funds trade in and out quickly, so part of this demand can leave just as fast as it arrived.
Long-End Yields Are Testing a Line TLT Holders Can’t Ignore
What matters most at the macro level is the long end of the yield curve. Fed cuts help less than you might think. The 10-year yield rose from 4.0% in February to a one-year high of 5.3% on October 5. Rising rates on long bonds usually mean bond buyers are worried about inflation and federal deficits, and that worry can push long yields higher even while the Fed is cutting.
A relief rally has started. The 30-year yield dropped from 5.6% on October 9 to 5.4% on October 16, and TLT gained about 2% over the week. If the 30-year closes back above its October 9 level and the 10-year sets a new one-year high, the rally has failed, and buyers are demanding more pay to hold long debt.
Check the Treasury’s Daily Par Yield Curve Rates page or FRED’s DGS10 series once a week. The BLS monthly CPI report and the Treasury’s quarterly refunding announcement can move long yields sharply on the day they come out. 2022 shows the downside: inflation pushed the Fed into an aggressive hiking cycle.
A 36-Basis-Point Cushion Is All That Protects TLT Holders
TLT’s duration is the fund-specific factor to watch, measuring how much its price moves when rates change. Effective duration is about 15 years. In practice, a half-point rise in yields cuts the price about 7%.
Compare that with the yield. A 5.4% yield cancels about 36 basis points (hundredths of a percentage point) of yield increase over a year. If long yields rise more than that over a 12-month period, total return turns negative.
Convexity of 3.1 helps a little, because rallies lift the price slightly more than equal selloffs cut it. Monthly payouts are also dropping off. October paid $0.31 per share, down from $0.33 in August. iShares updates duration and SEC yield on the TLT page every day.
For comparison, the iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF) responds far less to rate moves. The Vanguard Extended Duration Treasury ETF (NYSEARCA:EDV) holds zero-coupon STRIPS (bonds that pay everything at maturity) and swings even harder than TLT.
Two Numbers Will Decide Whether TLT’s Record Inflows Pay Off
A drop in the 30-year yield to 5% would add roughly 6% to the price before income. Each month, confirm the SEC yield is still above 5%, because that income is the only thing absorbing about a third of a point of rising rates.
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After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years, he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, Money Morning, and, of course, 24/7 Wall St. He has been featured in both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.
