Macro Wrap – What About $TLT

by Enis April 3, 2013 7:33 am • Commentary

Chatter about the bond market has been reduced to a hush recently, as bonds have hardly moved for most of 2013.  But the Treasury bond market is the largest financial market in the world outside of currencies, so it’s worth paying attention to bonds to see what the REAL BIG money is doing with its extra cash.

I discussed the phenomenon of a rising bond market along with a rising stock market in my CotD post last week.  There are many potential explanations, but what matters is that it’s not a simple, investors are buying stocks and selling bonds because they’re confident on growth, or they’re buying bonds and selling stocks because they’re nervous on growth.  Too many factors to make any simple conclusions.

However, bond price action is relevant when considered as one piece of a big puzzle.  So which side of the ledger does it fall into currently?

Here’s the 10 year chart of $TLT:

10 year monthly chart of TLT, Courtesy of Bloomberg
10 year monthly chart of TLT, Courtesy of Bloomberg

For most of the 2003 – 2007 bull market in stocks, longer dated government bonds did not move much.  In that time, short-dated rates went higher, and long-dated rates stayed flat, so it was a different rate environment than the past 5 years of ZIRP.  In the 2009-2013 bull market though, longer dated bonds have been more volatile, with the most extreme move coming after the S&P downgrade of the U.S. (as bond managers were actually forced to buy more Treasuries to maintain the overall credit rating of their total portfolio).

TLT never looked back.  Even as the SPX index has rallied almost 50% since its Oct. 2011 low, TLT has not sold off.  For those expecting an eventual decline government bond prices, this strength in TLT despite strong stock prices should raise some question marks.  The underlying demand for Treasuries is still robust (for better or for worse).