US Treasuries show ETFs are changing how we invest

Popular long-duration US Treasury ETFs are influencing stocks and bonds alike

Rob Isbitts

US Treasury bonds

There is a picture I cannot stop looking at in my mind. This picture reminds me of the Seinfeld TV series episode, “The Kramer,” where Jerry’s hilarious sidekick poses for a painting.

A high-brow couple sees it at an exhibit and said: "He's a loathsome offensive brute, yet I can’t look away."

When considering the damage that the iShares $ Treasury Bond 20+yr UCITS ETF (IDTL) and its US equivalent, the iShares 20+ Year Treasury Bond ETF (TLT), have done to some investor portfolios during its 47% decline since 4 August 2020, that same description may apply.

It is not only the crash in IDTL and TLT and the flood of recent investor interest into the US Treasury ETFs, it is the shape of the US Treasury yield curve, particularly at the 10-year and 30-year maturity levels.

20-year US Treasury yields above the 30-year 

As of Monday, the 10-year US Treasury yielded 4.88% and the 30-year yield was 5.04%. That part of the curve is again “upward-sloping” the way it usually is, since the longer you lend money to the US government, the more income you want as compensation for the length of that loan.  

Between five years and 30 years to maturity, yields are back to normal, upwardly sloping. Except, that is, for 20-year US Treasuries. They yield 5.21%, comfortably above the 30-year by 0.17%.

Since the beginning of 2000, nearly every time that divergence existed, it coincided with a period in the stock market and economy where things were getting bad, and about to get much worse. Specifically, during the buildup to the worst part of the 'dot-com' bubble and the Global Financial Crisis and now. The 20-year yield has exceeded the 30-year since October 2021.

What is the 20-year bond telling us this time around? We cannot say for sure but it may just have something to do with TLT and IDTL. 

Explaining volatility in 20-year prices

The surge of buyers, especially in the US, apparently had plenty of activity on the sell side, enough to turn a lot of that new investor money into losses very quickly, as rates continued up and TLT and IDTL continued to go down in price.

Since IDTL and TLT are focused on the last one-third of the maturity spectrum from 20-30 years and do not invest in the benchmark 10-year US Treasury bond, it is possible that the sell side or short side (including lots of option trading around TLT) is creating an unusual “bump” in the yield curve at the 20-year mark.

TLT is gradually taking its place alongside the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) on the Mount Rushmore of popular ETFs in the US.

However, TLT and IDTL may not be the best ETFs to invest in long-term bonds. The higher yield is a benefit for the moment, but TLT could have a lot of outside “noise” in the form of an array of market participants that are using that ETF for trading strategies. There might be less dramatic surroundings for bond investors to research.

This may explain how the 20-year yield rose sharply, and why TLT has been such a drag for anyone who tried to buy the dip, thinking the bottom was at $120, or $100, or at $85. It closed on Monday at $84.

Instead, what investors, and especially fiduciary financial advisers pining to “pick the bottom” should be doing is determining what their investment process is for owning TLT, or any other bond ETF, after this historic rise in interest rates across the US Treasury yield curve. And, in what size allocation makes sense for the investor.

The US Treasury yield curve between 10 and 30 years to maturity is a loathsome offensive brute. But until the TLT oddity reverts to normal, I cannot look away.

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