Time to buy long-dated Treasury ETF?

Investment Analysis Clubs Macro Economic Trends and Risks
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@Kingran posted on the Falling Knives board about whether this is a good time to buy $TLT which is a long-duration Treasury bond ETF.

Bond prices fall as bond yields rise so the ETF NAV has fallen recently.

I am cross-posting my response to Kingran.

Kingran asked: Are we looking at 6% 10 yr, 30 yr in the near future?

I answered:

@Kingran I have been watching Treasury yields for over 20 years. I’m hesitant about this also.

fred.stlouisfed.org

Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted…

Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis

fred.stlouisfed.org

10-Year Real Interest Rate

10-Year Real Interest Rate

There are some big “ifs” that pressure the Treasury real yield.

If inflation increases due to the tariffs and reduced immigration.

If deficits grow like the CBO is predicting, overwhelming market demand and forcing yields higher (prices lower).

If the U.S. antagonizes foreign buyers, such as China, so they no longer want to buy U.S. Treasuries. Just as important, if the tariff war reduces Chinese imports as intended, so the Chinese don’t have as many trade surplus dollars to invest in Treasuries.

If the Federal Reserve continues to allow its bloated book of Treasuries to roll off (as planned) and doesn’t reverse course and suppress Treasury yields with QE.

Elevated risk premium due to market uncertainty.

The Treasury real yield is currently lower than the pre-2000 norm. I consider the years 1990-2000 to be a “normal” decade because inflation was pretty well-controlled at that time and the market had finally stabilized after recovery from the Volcker shock treatment.

It’s quite reasonable to expect the Treasury real yield to be in the range of 3% instead of under 2%. Then add the factors above.

The market’s inflation expectation is stable at 2.3%.

fred.stlouisfed.org

10-Year Expected Inflation

10-Year Expected Inflation

A real yield of 3% would give a 10YT nominal yield of 5.3%. But the other factors and risk premium could potentially increase the nominal yield to 6%.

I would consider buying individual bonds, collecting the interest and holding to maturity. (Or death, which is likelier for me.) I would not consider buying a bond fund like $TLT because the NAV will fall if the interest rates rise and you may never regain the principal. The longer the fund’s duration the bigger the loss.

I think $TLT may be a falling knife that has further to fall. I don’t necessarily think it would be unwise to gradually build a ladder of individual bonds to hold to maturity.

Wendy

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There is zero way I buy long term debt during uncertain times like this. Either through ETFs and funds, or individual bonds.

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The damage on this is done is my view. When US and West freezed Russian foreign assets that made many nations rethink their reserve strategy. Now, add to that what this current administration is doing is not helping. No one is explicitly talking or pushing back. Instead reserve banks are slowly moving away. Reserve bank purchase of Gold used to be around 22 tonne per annum, post Ukraine has jumped to 88 tonne. This was one of the drivers behind the Gold price raise.

Separately, today US debt to GDP is really bad. I see no signs of it getting better.

I hear you on $TLT, my choice of $TLT is primarily because it is easy to trade compared to individual bonds and I am certainly not interested in holding them for a longtime.

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Another way of looking at is, US debt will structurally pay more compared to EU, or other developed nation bonds. The reason I am stating this is, I considered diversifying internationally but realized, EU bonds are actually paying less compared to US.

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Things are extremely whacky right now, and they’re fixin’ to get whackier. TFG’s past performance is the best predicter for his future behavior.

He’s a bankrupting machine. There’s no one better, he’s probably the best at bankrupting companies that the world, no…the universe has ever seen!

I’m no expert in trading US treasuries, but there is a real risk of default. Hyperbole? Fear mongering? We’re living in unprecedented times. Welcome to Bonkersville.

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10-30 year timeframes are too long, for me anyways. But I am watching yields for 2-10 T-notes. I would use these for money that is to be used ( withdrawn ) over that timeframe.
I’m keeping the money that would “normally” be invested in stocks in T-bills, for now. I need to see the current admin reeled in. Congress has completely failed at that so far, they are not even trying. So it looks like the Bond Market is drawing the line in the sand as the “responsible adults” in the room, for now.

I know on Fidelity that you can sell Treasuries, but I have not done this. When/if interest rates are forced down in a recession, 5 or 6% Treasuries would go up in price. So the longer duration Treasuries could be a good investment for capital gains, if this plays out like the GFC did.

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Absolutely. US cannot default. The value of $$ might go low, but US can always print and pay back.

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I agree with @Kingran. There is no chance of default.

The U.S. has never defaulted on a government obligation since 1790. Interest payments to lenders were prioritized over every other obligation. (cf. Alexander Hamilton.) That was before a Federal Reserve existed to conjure fiat money out of thin air.

The U.S. will never default but the price of the debt may sink far relative to today (driving interest rates up).

The idiotic idea of charging foreigners a “tax” on their purchases of Treasury debt would be an implicit default but not an actual default.

Wendy

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I bought 10 year TIPS in October 2008 when their yield was 3% over the inflation rate – the highest in history. As interest rates fell in the following years their price rose. I could have sold them but I chose to hold onto them for the high yield. They couldn’t be replaced after the panic.
Wendy

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Thanks for the reply. Maybe he can’t pull it off, but TFG has clearly said that default is on the table. For all of his countless flaws, he’s pretty good and making the unthinkable happen.

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Default on the money interests? Unlikely. Those are the people who can buy Trump crypto, to gain access. Those are the people who pressured the government to make Fannie and Freddie paper good, even though the prospectus clearly said they were not backed by the government. Those are the people who had AIG bailed out, for their own benefit.

In the private sector, the ways to stiff counterparties are limited. In government, especially in a regime that considers fundamental personal rights something that can be ignored, because they are a burden, the means of electing stiffees are much more varied.

-as “Plan Steve” already pointed out: institute extreme requirements for proof of citizenship to obtain, or retain, benefits. This is already in process, with proposals to require proof of citizenship to change an address or bank account for direct deposit. I fully expect to receive a letter/letters from SS and/or CMS demanding proof of citizenship to continue to receive benefits, within the next 3-4 years. As long as everyone denied benefits is pronounced a “fraud”, the base would be OK with it.

-so far, most of the deportees have been in the low income strata. iirc, in the late 30s, about a quarter of the German Federal budget was covered by property seized from people the regime deported. If the “border czar” raises his sights, like declaring all Muslims a “threat to national security”, and deports them, the government could pocket some serious money. Around here, many Muslims are professionals: lawyers, doctors, educators, small business owners, people who are likely to have significant assets the government can profit off of. As long as everyone who is robbed and deported is not a straight, white, Christian, the base would be OK with it.

Steve

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