Sunday, March 5, 2017

Long Term Treasury Bonds and the Effects of Rising Interest Rates

Here at Perceptive Investment Research, we continue to receive a lot of questions about interest rate hikes and the bond markets. Common thought is that when the Federal Reserve raises interest rates, the bond will falter and drop in value. Today we're going to look at iShares 20+ year treasury bond ETF, which trades under the ticker symbol TLT.

The weekly TLT chart above shows that the Federal Reserves rate hike on 12/16/2015 had little effect on TLT, instead of falling, TLT instead rose to an all time high of $143.62. Now could this have been baked into the price of TLT after years of the Federal Reserve not raising rates after the financial crisis of 2008-2009? Possibly. After TLT reached it's all time high, it retreated heavily over a period of almost a year. A few Federal Reserve officials stated that they expected that they would raise 2-3 times in 2016. They only raised once. The talk from the Fed officials expecting 2-3 rate hikes in 2016, likely spooked bond traders and TLT tumbled. The second rate hike in a decade was on 12/14/2016 and TLT did retreat to a 52 week low of $116.80 but did not fall further and started regaining footing in the coming days. Twice now, when the Fed raised rates, TLT did not plunge. It's likely that in both instances that the rate hike was baked into the price of TLT and that was the root cause of only minor reaction.

Debt Ceiling

The debt ceiling is fast approaching once again. If you look back to 2011 and 2013 after Congress agreed to raise the debt ceiling, TLT took off. If Congress once again raises the debt ceiling this March, look to TLT to continue on it's long term trend upwards. The United State government is unlikely to default on bond obligations:

Bear Market Performance

The 2008-2009 bear market was during one of the greatest economics crisis' since the Great Depression of 1929 and was caused by the housing bubble. Many people lost their jobs, retirement savings and homes. The performance of TLT from late 2007-2009 is astonishing if you look at the chart above. As equity prices started to come back at the end of the bear market, TLT retreated. For diversification purposes, especially if we start a bear market, having TLT could prove beneficial to your portfolio.

Current Outlook on TLT

Our current outlook on TLT is bullish. The chart above shows strong daily support and accumulation around the $118 to $119 level. Accumulation typically signals a strong demand for a security around a certain price level. TLT is also oversold on the Full Stochastic indicator. Prior oversold levels ended with TLT rallying. Even if the Federal Reserve raises interest rates, we expect the high demand area of $118-$119 to hold as support. The long term trend of TLT is up according to the weekly chart below: 

We believe TLT will continue it's long term trend up and in the event of a bear market, it will see significant inflows. It's oversold position and strong accumulation on the daily chart signal a move up, regardless of what the Fed does in March. The debt ceiling decision is likely to have an effect as well. A pull back to the horizontal support level of $116 is possible before continuing the trend up. TLT, since inception has never fallen below it's 200 Weekly Moving Average. That feat on it's own is quite astonishing. According to TLT History, if you were to put $10,000.00 in TLT on 03/05/07 and leave it there until today, while reinvesting the dividends, you would now have $18,286.18 if in a tax sheltered account such as a Roth IRA. The compound annual growth rate or CAGR is 6.22% with a total return of 82.86%. There is a leveraged version of TLT with the ticker symbol TMF.





Disclosure: We are long TLT.

Disclosure: The information provided in this article is not to be construed as investment advice. Any securities you buy are ultimately your decision. Investing carries risk. Always do your due diligence before buying/selling any security. We are not being compensated for writing this article.

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