ETF of the week: TLT waits for the Jackson Hole Symposium

The iShares 20+ Year Treasury Bond (TLT) ETF has crawled back in the past few months as concerns about the American economy have risen. The TLT ETF fund jumped to a high of $100 earlier this month, its highest point since May 2021.

TLT ETF inflows rise

The iShares 20+ Year Treasury Bond ETF is a big fund that invests in long-dated US government bonds.

It has done well this year as the amount of inflows have jumped in the past few months. Data by ETF.com shows that it has added over $8 billion in inflows this year, bringing its total assets under management to over $61 billion.

It has had inflows in the past four consecutive months and this trend may continue as jitters about the economy rise. 

Other similar bond ETFs like the iShares 7-10 Year Treasury Bond (IEF) and the iShares TIPS Bond ETF (TIP) have had some inflows recently. 

The main catalyst for the fund has been economic numbers that revealed that the economy was not doing well. A recent report showed that the labor market was softening, with the unemployment rate rising to 4.3%, the highest point in over two years. This increase pushed the Sahm rule index rose to 0.53, raising recession risks.

The economy added over 114,000 jobs in August, the smallest increase since 2021. At the same time, there have been concerned about the unwinding of the Japanese yen carry trade, which is estimated to be worth over $500 billion.

Recently, however, recession fears have eased. Just last week, the US published encouraging retail sales data. Also, the initial jobless claims have improved in the past two consecutive weeks, lowering the recession risk.

Therefore, while recession risks have remained, most analysts have started to lower their recession risks. In a statement last week, Goldman Sachs CEO, David Solomon, said that the US would avoid a hard landing. His bank’s analysts have also lowered their recession risks. 

All these factors have had an impact on the bond market. The 10-year yield has moved to 3.87% while the 30-year has retreated to 4.13%.

An important week for the US bonds

This will be a big week for US bonds for two main reasons. First, the Federal Reserve will publish minutes of the last meeting on Wednesday. These minutes will provide more color about the recent meeting and what to expect in the coming months.

Second, and most importantly, the Kansas Fed will host the closely-watched Jackson Hole Symposium in Wyoming. This is a important meeting that sees central bank officials and economists from around the world meet and deliberate on key issues.

The climax of this meeting is usually the speech of the Federal Reserve chair. Since there is no scheduled meeting this month, this meeting will provide more information on what to expect in the coming meeting.

In the July meeting, Jerome Powell said that he left the door for a Fed cut wide open. Therefore, the TLT ETF and other similar funds will likely react to this meeting.

But there is a caveat. For the funds to have a major move, Jerome Powell needs to come up with a surprise, which is likely not the case. Besides, economists and the swap market has already priced in a 25 basis point cut in September.

The risks for the fund

Still, in the long-term, long-term US bonds face a significant risk now that public spending is expected to continue rising. 

In an ideal situation, politicians like Donald Trump and Kamala Harris should be talking about deficit reduction and how to lower the debt now that it has jumped to over $35 trillion. However, the two have not addressed the debt well.

In her policy statement, Kamala Harris said that her government would ensure the building of over 3 million homes. Such a government-led plan would lead to more deficits, especially since she did not share the pay for aspect.

The same is the case with Donald Trump’s plan to continue cutting taxes, which would lead to more deficits. As such, since long-term bonds are seen as safe havens, there is a risk that default risks will lower their appeal.

TLT ETF stock analysis

TLT chart by TradingView

In my past articles on the TLT ETF, which you can see here and here, I have made the case against investing in it. These views have been accurate as it has continued to underperform the broader market.

The weekly chart shows that the TLT ETF stock has crawled back in the past few months and is hovering around $100. It has moved slightly above the 50-week and 100-week Exponential Moving Averages (EMA). 

Additionally, it is loitering at the 23.6% Fibonacci Retracement point. The MACD has moved above the neutral point while the Stochastic Oscillator has moved to the overbought level.

Most importantly, it has formed an inverse head and shoulders pattern, a popular bullish sign. Therefore, the fund will likely continue rising as buyers target the 38.2% retracement point at $110.