Today, investors are showing an extraordinary amount of interest in the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT). This exchange-traded fund that tracks long-term government bonds has seen an outsized move, sinking more than 2% in early afternoon trading. As a long-term bond fund, the TLT ETF usually sees very small moves on a given day, with such moves raising investor eyebrows around the world.
This move in the TLT ETF appears to be directly related to yesterday’s Federal Open Market Committee (FOMC) meeting. The Federal Reserve, as predicted, kept the overnight lending rate at a range of between 5.25% and 5.5%. However, strong inflation data have led the Fed to make it abundantly clear that “higher for longer” is here to stay. Higher interest rates generally mean lower bond prices, hence the move in the TLT today.
That said, some experts have cited expected volatility around these meetings as the rationale for this move. In other words, there’s nothing to see here.
Let’s dive into what investors should make of this move.
The TLT ETF Sinks Following Yesterday’s FOMC Meeting
A move lower in bond prices, corresponding to a surge in long-dated yields, ought to be concerning for many investors. Indeed, there’s a pervasive view on Wall Street that the bond market is the “smart money” that drives moves in equity prices. With all major indices seeing significant declines over the past day, this appears to be the case.
Investors are now beginning to price in higher interest rates for longer in the bond markets. And this is being reflected in the performance of the TLT ETF. What this means is that the yield curve is less inverted than it was before. And it should be noted that each and every recession in recent history has been preceded by a yield curve inversion, and an un-inversion of the yield curve. Thus, for those who have been betting on an impending recession, this isn’t necessarily a good thing.
My view on today’s move is that the Federal Reserve is finally getting through to investors. If the bond market takes the Fed at its word and raises long-term yields even higher, the cost of everything from consumer credit to mortgages will rise. This, in turn, could provide a much more restrictive monetary policy environment than the Fed is ultimately trying to create, forcing a significant downturn at some point in the coming quarters.
My view on the markets is growing increasingly pessimistic, and this is one of the key reasons. I think investors are right to take some risk off the table today. I’d watch how long bonds perform from here relative to the short end of the curve. This is what investors should be watching closely right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
