Why did the VGLT and TLT ETFs retreat after the NFP report?

The Vanguard Long-Term Treasury Index Fund (VGLT) and the popular iShares 20+ Year Treasury Bond ETF (TLT) retreated after the blemish-free US non-farm payrolls (NFP) data. The TLT fund retreated by 90 basis points tpo $96.35% while the VGLT fell by 1% to $60.

These long-term Treasury bond ETFs have been in a strong comeback in the past few weeks as the Federal Reserve pointed to three rate cuts this year. The TLT ETF has jumped by over 17% from its lowest point in 2023. Similarly, the VGLT fund was up by over 18% in the same period.

VGLT vs TLT ETFs

This situation has changed this week as traders change their Fed expectations. The closely watched Fed Rate Monitor tool shows that the Fed has a 53% chance of cutting rates in March this year. On Monday, the percentage was over 70%.

This view was changed earlier this week when Tom Barkin of the Richmond Fed warned that the Fed could still hike interest rates in the coming months. This was a notable statement since Barkin will be an FOMC committee member this year.

There are signs that inflation will be stickier in the coming days. For example, as I wrote in this article on ZIM Integrated, global shipping costs have surged as the crisis in the Middle East continued.

This view was also confirmed by the latest non-farm payrolls data. According to the Bureau of Labor Statistics (BLS), the economy added 216k jobs in December, higher than the median estimate of 170k. It was also the biggest increase in months.

The unemployment rate remained steady at 3.7% while the average hourly earnings rose by 4.1% and 0.4% on a YoY and MoM basis, respectively. Therefore, with inflation still above the Fed’s target of 2.0%, there is a likelihood that the bank will embrace a calm attitude when making the next decisions. 

The VGLT and TLT ETFs, which have $12 billion and $49 billion in assets, do well when the Fed has embraced a more dovish tone. However, fundamentally, in the long term, they face substantial risks as the public debt jumps. The total public debt has jumped to over $34 trillion and there is a likelihood it will end the year at $35.5 trillion.