TLT – Why Longer-Term Bonds Are a Great Bet for 2016

Deflationary pressures make the TLT ETF a good strategic play through the rest of this year ... and maybe longer

As a result of a brutal start to 2016 for equities and risk assets worldwide, U.S. bonds have received a bid that increasingly looks to push them into a better upside trend. Global growth concerns, the constant threat of more geopolitical turmoil and dramatic deflationary pressures will make it difficult at best for the Fed to continue its marginally hawkish rhetoric.

Beat the BellAdd to the fact that U.S. economic data has been slowing for the past three quarters, and that jobs data tends to peak late in the economic cycle, and you have a scenario where longer-term bonds — as represented by the iShares Barclays 20+ Yr Treas. Bond (ETF) (NYSEARCA:TLT) — probably will see buying pressure throughout most of 2016 (and possibly beyond).

Deflationary pressures have been weighing on global assets for about two years now as the U.S. dollar continues to rise, commodities are in free-fall and other risk assets (such as high-yield bonds) look to be on the verge of something uglier still. From a risk management perspective, this means we live in an environment where capital preservation should be the goal, not chasing rewards.

And in that kind of environment, it makes sense to own bonds.

Before looking at the charts, let me be clear: This is not an immediate-term call on my part to action to buy longer-dated bonds (i.e., the TLT ETF), but more of a structural theme for 2016 as deflationary pressures likely will weigh on stocks throughout this year.

TLT ETF Charts

Looking at a multiyear weekly chart of the TLT ETF, note that despite a very strong and long cyclical bull market for stocks, longer-term bonds continue to make higher lows. An important higher low was cemented in early 2014 and another higher low from last summer increasingly looks to be anchoring itself as well. The price action for longer-dated bonds since early 2015, however, has been one of consolidation of the 2014 rally, and unless the summer 2015 lows get taken out still favors a resolution higher.

TLT ETF multiyear chart
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Zooming in on the daily chart of the TLT ETF, we see that Tuesday’s rally pushed it right into the black-dotted diagonal line of resistance. With stocks looking immediate-term oversold I am not sure this is the exact spot to chase higher the TLT ETF, although an initial long position certainly could be initiated at present levels.

Also note that due to the consolidation phase over the past 12 months, the medium-term moving averages (50-, 100- and 200-day) are all flatlining and trading near each other.

TLT ETF daily chart
Click to Enlarge

Ultimately this will lead to better separation of the moving averages, and if my call on the deflationary pressures is correct, we should see the TLT ETF work higher toward the mid-$130s through 2016.

I will update this call as we work through this year.

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