TLT ETF forms death cross after Fed’s hawkish twist: what next?

The iShares 20+ Year Treasury Bond ETF (TLT) slumped by almost 2% after the Federal Reserve delivered its last interest rate decision of the year. TLT slumped to a low of $89, its lowest level since November 18. It has crashed by over 11% from the year-to-date high, meaning that it is in a technical correction. 

Federal Reserve decision

The TLT ETF crashed hard after the Federal Reserve decided to cut interest rates by 0.25% on Wednesday. That cut brought the benchmark interest rates to between 4.25% and 4.50%. It has now slashed interest rates by 1% this year.

The bank hinted that it was concerned by the US inflation, which has stopped falling. Recent data showed that the headline Consumer Price Index (CPI) rose from 2.4% in October to 2.6% in November.

Core inflation remained at 3.3%, much higher than the Federal Reserve’s 2% target. The bank now expects that inflation will take longer to move comfortably to the 2% level.

It has now shifted its focus from the labor market to inflation. The labor market remains challenging, with the unemployment rate rising from 4.1% to 4.2% in November. 

Most importantly, Fed officials changed their dot plot and are now expecting two interest rate cuts in 2025 instead of the previous four. Another notable thing is that one FOMC official, Beth Hammack, maintained a hawkish tone and favored leaving interest rates unchanged. 

The Fed has insisted that the economy is doing well. It is on track to grow by about 2.5% this year, beating many of the world’s top economies. For example, economists believe that Europe has avoided a recession narrowly this year. 

The Fed is concerned about Donald Trump’s policies. He has pledged to hike tariffs on goods from top countries like China, Mexico, and Canada. He hopes that these tariffs will help to reduce the country’s trade surplus over time. Instead, the reality is that these tariffs will be passed to consumers since China and Mexico have lower costs of doing business than the US.

TLT ETF and bonds

The TLT ETF is a popular ETF that gives investors access to long-term government bonds. Data shows that the 30-year Treasury yield jumped to near 4.7% after the Federal Reserve decision. It has risen sharply from the year-to-date low of 3.90%.

Other short-term bond yields also jumped. The 10-year yield rose to 4.52%, its highest level since May this year, while the five-year rose to 4.40%.

These yields often rise when there are expectations of high interest rates by the Federal Reserve. A higher bond yield usually happens when the bond price is falling. 

Hopes of a more hawkish Fed explains why the TLT ETF is having the worst-performing months this year. It has had outflows worth over $1.6 billion, bringing the net year-to-date inflows to $6.4 billion.

The biggest risk for the TLT ETF is the soaring US public debt, which stands at over $36 trillion, a figure that is growing by over $1 trillion every few months. This debt puts the US at risk of a default in the coming years.

TLT ETF stock analysis

TLT chart by TradingView

The daily chart shows that the TLT ETF has been in a strong bearish trend in the past few months. It has slipped and moved to the key support level at $88.93, where it failed to move several times this year.

The ETF has also formed a death cross chart pattern as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other. The Relative Strength Index (RSI) and the MACD indicators also pointed downwards. It also formed a head and shoulders pattern.

Therefore, the odds are that the fund will have a bearish breakout as sellers target the next key support at $86.