Long-duration US Treasury ETFs: Are interest rates too high?

BlackRock's long-duration US Treasury ETF fell to a new low earlier this month but may offer a buying opportunity

Andrew Hecht

US Government

Is now the time to buy the iShares $ Treasury Bond 20+yr UCITS ETF (IDTL)?

IDTL fell to a new low earlier this month after the January Consumer Price Index (CPI) rose a hotter-than-anticipated 0.3% and the Producer Price Index (PPI) also failed to meet expectations.

IDTL, which is a highly liquid US government long bond ETF, was recently trading near the bottom of its 2024 trading range this year.

After two negative years, IDTL returned 3.1% in 2023 amid rising investor optimism about inflation, potential US central bank interest rate cuts and the economy.

But with inflation’s latest jump and the Fed’s dovish turn on hold, buying IDTL on dips over the coming months could be an optimal approach to the product that tracks long-term US interest rates and has $7.2bn assets under management (AUM).

Fed rate cut signals

Inflation measured by the CPI, PPI, and PCE moved lower over the past months, causing bonds and IDTL to rally from the October 2023 16-year low.

The US central bank paused rate hikes over the past months as inflationary pressures receded, but although they have not lowered rates yet, they are likely to later in the year.

Meanwhile, the January jump in CPI and PPI have caused long bond futures and IDTL to move to marginal new 2024 lows.

Flight to quality

While inflation is a critical factor for the path of least resistance of US rates over the coming months, geopolitics will also determine trends as the US remains the world’s leading economy.

The ongoing war in Ukraine and the potential for an escalating conflict in the Middle East could cause sudden flight-to-quality action in markets. Investors and traders worldwide consider US bonds and the US dollar safe havens in tumultuous times.

Hostilities could lead to sudden sharp rallies if worldwide hostilities increase or spread to other regions.

US presidential election

The uncertainty of the US presidential election and other issues could pull bond prices in opposite directions over the coming months, with the Fed striving to remain apolitical.

While growing US debt at over $34trn could put pressure on the US credit rating and push bonds lower, the election and global unrest could also increase the safety profile of US government debt.

Bullish and bearish factors pulling bonds in opposite directions could limit any significant price moves outside the 2023 range.

Attractive returns will drive capital into government bonds

The latest CPI data poured cold water over the recent stock market rally. As stocks falter, US government debt securities with guaranteed rates become more attractive investment vehicles. Rates are far higher than over the past years, causing some investors to shift capital from equities to fixed-income assets.

Higher rates have caused capital to flow into IDTL in early 2024.

To be sure, the inflationary spiral is likely over. But the Fed’s 2% target remains challenging. Rates are therefore likely to remain in a narrow range over the coming months. The recent move to a new low for 2024 could be a buying opportunity as capital flows toward fixed-income assets offer attractive yields.

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