In a late November 2024 Barchart article on the U.S. bond market, I highlighted the reasons why long-term rates are not falling with short-term rates. On November 27, 2024, the nearby 30-year Treasury bond futures were at the 119-12 level, with the TLT ETF at $92.90 per share. In early February, the long bond futures were lower at 114-23, and the TLT ETF was trading at $88.25 as long-term rates remained elevated.
Long-term bonds remain under pressure but continue to consolidate
The bearish trend in the U.S. 30-year Treasury bond futures markets remains intact in early February 2025. Still, the long bond futures have not challenged the October 2023 low as they continue consolidating.
The monthly chart highlights the bearish trend, with the long bond futures hovering near the October 2023 lows. However, since 2024, the futures have consolidated in a 110-19 to 127-22 range. At the 114-23 level, they are closer to the low than the high of the just over one-year trading band.
The Fed curbed its enthusiasm for Fed Fund Rate cuts in late 2024
The Fed cut the short-term Fed Fund Rate by 100 basis points in 2024. After forecasting a further 100-point cut in 2025, the central bank adjusted its forecast to only 50 points of rate decreases in 2025 in late 2024. The central bank left rates unchanged at the first FOMC meeting of 2025.
With inflation remaining stubbornly above the Fed’s 2% target, the FOMC decided that aggressive rate cuts could fuel a resurgence of inflation, curbing its enthusiasm for a lower short-term interest rate environment. Meanwhile, rates further on the yield curve have remained high. While the central bank determines short-term rates as its chief monetary policy tool, the market establishes rates further on the yield curve. The bottom line is that the market is telling us that longer-term rates should remain higher in the current environment.
The administration wants lower rates
President Trump has made no secret of his desire for lower interest rates to promote U.S. economic growth. Together with recently appointed Treasury Secretary Scott Bessent, lower interest rates are a critical factor in the administration’s economic plans.
The Fed, led by Chairman Jerome Powell, is an independent body that conducts monetary policy. We could see mounting friction between the Fed and the administration if the Fed does not respond to the President’s wishes and demands to lower interest rates. Ironically, Democrats on the Senate Banking Committee. Senator Elizabeth Warren is the committee’s new ranking minority member. In September 2024, Senator Warren advocated for lower rates and more Fed rate cuts to aid consumers. While Democrats and Republicans do not agree on many policy initiatives, there seems to be bipartisan agreement on lower rates, which could put significant pressure on Chairman Powell and the FOMC to lower the Fed Funds Rate by more than the forecast 50 basis points in 2025 if inflation data continues to show progress toward the 2% level or stabilize at current levels.
Meanwhile, tariffs could increase inflationary pressures, causing additional bond market volatility. The bottom line is that while the politicians can attempt to influence the Fed, market sentiment will determine the long-term rates. Moreover, the inflation data will be a function of economic initiatives and geopolitical events.
The U.S. debt remains a roadblock
One of the leading reasons why long-term U.S. interest rates have remained stubbornly high is that the U.S. debt has dramatically increased. The latest debt is at over the $36.433 trillion level. With the Fed Funds Rate at the 4.33% level, the debt increases by over $1.59 trillion annually if U.S. spending and receipts remain balanced. The bond market is telling us that the debt is too high to support lower long-term interest rates. The debt level weighs on the full faith and credit of the U.S. government that issues government debt securities.
The bullish and bearish case for the 30-year bond futures and the TLT ETF product
The iShares 20+ Year Treasury Bond ETF product (TLT) moves higher and lower with long-term U.S. interest rates. TLT is a highly liquid ETF with over $53.34 billion in assets under management. It trades an average of over 34.24 million shares daily and charges a 0.15% management fee. The current dividend yield is around 4.28%.
The monthly chart mirrors the long bond futures, which had lows in October 2023 and have been consolidating near the low since 2024.
The bullish case for the bonds and TLT ETF is as follows:
- The administration and leading Democrats on the Senate Banking Committee support lower interest rates.
- Inflation data has declined over the past months and stabilized.
- The administration’s pledge to increase U.S. oil and gas production to reduce prices, lower inflation, and increase export revenues could set the stage for lower interest rates.
- The current bond market consolidation has not challenged the October 2023 low, which could set the stage for a recovery rally.
- U.S. government debt securities have historically been a safe haven during periods of turmoil.
The bearish base for the bonds and TLT ETF is:
- The growing U.S. debt level remains a clear and present danger that weighs on the full faith and credit of the U.S. government and the pricing of U.S. government debt securities.
- The bond market trend remains bearish in February 2025 and is always a trader or investor’s best friend.
- Tariffs under the Trump administration could increase inflationary pressures over the coming months.
The bond market is at a critical level, remains in a bearish trend, and is not far from a challenge of the October 2023 low. Bullish and bearish factors continue to pull the long bond futures and TLT ETF in opposite directions in February 2025. They will eventually break higher or lower, but the path of least resistance for a potential up or downside breakout is not clear in the current environment. We could see lots of volatility in the bond market over the coming months as we find out if U.S. interest rates have peaked or if they have further upside.
