iShares 20+ Year Treasury Bond ETF: Short TLT, rates were too low


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The US Federal Reserve controls short-term interest rates via the Fed Funds rate. Public debt securities determine medium and long-term rates and are a function of supply and demand in the bond market. At the start of 2022, bonds trended lower, reaching the lowest level since March 2021 last week.

Rising interest rates along the yield curve impact markets in all asset classes. Higher rates increase the cost of holding inventory, depressing commodity prices. Since bonds compete with stocks for investment capital, higher rates tend to cause equity market exits. The booming real estate market could suffer from rising mortgage rates, halting the incredible rise in house prices.

Meanwhile, real interest rates are nominal rates minus the rate of inflation. Over the past few weeks, the bond market has told us that real interest rates have remained in negative territory. The decline could be an attempt to bring yields back to a level that reflects economic conditions.

The unemployment rate has fallen below 4%. Companies continue to report impressive earnings. Wages are rising and inflation continues to weigh on the economy. The fall in the bond market mirrors the economic landscape in mid-January 2022. APS is short on the highly liquid iShares 20+ Year Treasury Bond ETF (TLT) product, which tracks long bond futures.

Encouraging borrowing and spending and inhibiting saving has gone on too long

Quantitative easing boosted economic conditions when the 2008 global financial crisis caused market turmoil across all asset classes. The monetary policy mechanism where the Federal Reserve bought longer-term debt securities and kept them on its balance sheet made a comeback in 2020 as the global pandemic sent panic to markets and threatened the worst. slowdown since the Great Depression of the 1930s. The Fed began buying $120 billion worth of government securities and mortgage-backed debt, a program that continued through 2020 and 2021 .

As inflationary pressures began to mount due to the tidal wave of liquidity and massive government stimulus measures in the trillions, the Fed blamed the economic situation on chain bottlenecks. of supplies inspired by the pandemic and suggested that it would subside. The central bank pointed to a fall in the price of wood over the summer and assumed the shortage of semiconductors would correct itself.

After months of rising consumer price index data, the Fed capitulated as the price hike proved to be structural and not temporary. At the November FOMC meeting, Chairman Powell announced that the central bank would begin cutting QE at a rate of $15 billion per month, paving the way for the takeoff of a zero percent federal funds rate. in June 2022. After an even uglier CPI report in December, the FOMC accelerated the QE cut, accelerating the first potential rate hike through March 2022. The FOMC minutes told markets that the Fed had begun discussing a balance sheet reduction program, allowing debt securities to exit its balance sheet at the end of QE, moving from quantitative easing to contraction.

Last week we learned that the CPI rose 7% in 2021, the biggest increase since 1982. The core CPI, excluding food and energy, reached the level of 5.5% in 2021, although above the Fed’s 2% average target. The producer price index increased by almost 10% in 2021.

In the end, the central bank waited too long to fight inflation. Although they blamed the supply chain for most of 2021, they never cited the monetary and fiscal policies that ignited the inflationary fuse. Once triggered, inflation creates a vicious cycle as rising input prices and labor shortages continue to put upward pressure on the prices of goods and services. Additionally, a dramatic shift in US energy policy has added insult to injury, pushing prices even higher.

The bond market woke up long before the US Federal Reserve

The Fed sets short-term interest rates via the Fed Funds rate. Longer-term rates are a function of bid and ask prices in the bond market. Even as the Fed purchased $120 billion in debt securities each month, the bond market began to decline in the summer of 2021.

Downtrend in the long bond

Weekly 30-Year U.S. Treasury Bond Futures


As the weekly chart of 30-year U.S. Treasury bond futures shows, the long bond has hit lowest highs and lows since July 2021. Last week, it fell to a low of 154- 19, a stone’s throw from technical support from March 2021 153-29 minimum. Futures were trading at the 155-14 level at the end of last week.

Long before the Fed moved to a more hawkish approach to monetary policy, the bond market was shouting that inflation was a clear and present danger.

The technical boss is ugly

Since early December, the March 30-year Treasury bond futures market has been a falling knife.

Bond Long Futures Bearish Trend

Daily 30-Year U.S. Treasury Bond Futures


The chart highlights the decline from 164-12 on December 3 to a low of 154-19 on January 10. At 155-14 on Jan. 14, the long was near the bottom in a downtrend.

Levels to watch in the bond market

At the December FOMC meeting, the Fed indicated a forecast of 0.90% for the Fed Funds rate in 2021 and 1.60% in 2022. With a core CPI at 5.5% a year last, with a nominal CPI at 7% and a likely double-digit consumer CPI, real interest rates are likely to remain negative as far as the eye can see. The Fed has become more hawkish, but actions speak louder than words. Last week, the Producer Price Index showed that wholesale prices rose nearly 10% in 2021.

The critical downside level for long bond futures lies at 153-29. Below, the October 2018 low at 136-16 is the next downside target. Technical resistance is seen at the July 2021 continuous 167-04 contract high. A further decline in the bond market will ripple through all markets as it will increase the cost of silver. Stocks tend to fall with the bond market. As higher interest rates increase the cost of holding inventory, commodity prices typically experience declines when bonds fall. However, 2022 is no ordinary period in history. Negative interest rates could cause equity and commodity prices to continue rising as inflation erodes the purchasing power of fiat money. The dollar and other world currencies derive their value from the full faith and credit of the governments that issue legal tender. Inflation erodes purchasing power and trust in the central bank and government. People tend to vote with their wallet and wallet. As prices rise, so does dissatisfaction with leadership.

APS is short the TLT

APS follows trends and is short in the bond market because the path of least resistance for bond prices is lower. We are agnostic about market fundamentals because sentiment determines price direction.

The APS holds ten highly liquid and optional stocks and ETF products. The iShares 20+ Year Treasury Bond ETF increasingly moves with long bond futures and is a liquid product that allows us to go long or short in the bond market.

We always have a risk position, so we never miss significant price trends. As of Friday, January 14, APS was short of TLT product.

At the $142.10 level on January 14, TLT had over $17.112 billion in assets under management. The ETF trades on average more than 16.6 million shares every day and charges a management fee of 0.15%.

Downtrend in long bond futures since early December 2021 high

30-Year Short-Term US Treasury Bond Futures

Bar chart

As the chart shows, the TLT ETF fell from $155.12 on December 3 to a low of $141.36 on January 10. At around $142.41 on January 14, it was near the recent low. The March 2021 low of $133.19 is a downside target, but APS will stay short until the trend reverses higher.

Accommodative monetary policy was needed in March 2020, but central bank inflexibility and inaction fueled the inflationary fire. If the central bank and the government had looked within and realized that their policies were responsible for the rising prices, they would have acted much sooner when the bond market started to sound the alarm during the summer months.

Meanwhile, the bond market trend remains down and rising inflation will be a tough beast to tame in 2022 if the Fed sticks to its short-term interest rate forecast.


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