The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) closed Thursday at $77.71, after touching a 52-week low of $76.76. The ETF has fallen about 15.7% from its 52-week high of $92.19.
Yet investors continue buying the dip even as the bond market suffers one of its sharpest selloffs in decades, creating a growing disconnect between TLT flows and price action.
Bloomberg Intelligence senior ETF analyst Eric Balchunas highlighted the trend Friday. The money "keeps pouring into $TLT as it keeps going down," he said.
He likened each additional 1% decline to another topping on an increasingly tempting bowl of ice cream. He argued that history suggests investors may be better off waiting for the safer short end of the Treasury curve.
The numbers explain the temptation: TLT attracted approximately $2.86 billion of inflows over the past five days, according to ETFDb.
That buying comes as long-term Treasury yields have surged. The 10-year Treasury yield climbed to 5.34% on Oct. 1, its highest level since 2002, while the 30-year yield topped 5.65%, according to Reuters. The 10-year yield rose 87.1 basis points during the third quarter, its biggest quarterly increase since 1994.
The Duration Problem
TLT’s appeal is straightforward. Its 30-day SEC yield was 5.49% and average yield to maturity was 5.65% as of Sept. 29. But investors are taking substantial interest-rate risk to collect that income. TLT’s effective duration is 14.74 years, meaning its price remains highly sensitive to long-term yield movements.
The broader ETF market shows that investors are embracing fixed income, not necessarily just TLT. U.S. fixed-income ETFs attracted $42.4 billion in September, slightly more than U.S. equity ETFs, according to ETF.com.
Friday’s weak jobs report pushed the 10-year yield down to around 5.17%, as markets reduced expectations for an October Fed rate hike.
But the central question for TLT investors remains the long end of the curve. The higher the yield, the more tempting TLT becomes, and the greater the duration risk investors are accepting.
For those seeking Treasury exposure with less sensitivity to long-term yields, ETFs such as iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF), iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) and iShares 0-3 Month Treasury Bond ETF (NYSE:SGOV) sit further toward the short end of the curve: the area Balchunas says investors may want to reach before taking another bite of the TLT "ice cream."
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