The Fed may control short-term interest rates, but market forces determine longer-term rates. In an October 24, 2024, Barchart article on the U.S. bond market, I concluded:
The Fed has taken the pressure off short-term interest rates and has told markets they will continue an accommodative path. However, the bond market is ignoring the central bank as longer term rates are a function of market sentiment determined by the domestic and foreign economic environment. The bottom line is that the bond market is screaming that the issues facing the U.S. financial system, the geopolitical landscape, and uncertainty over U.S. policy following the November election require higher rates as the U.S. government’s credit rating remains under pressure. Lower short-term rates do not guarantee that longer-term interest rates will decline.
The December U.S. 30-year Treasury bond futures were trading at 118-03 on October 23 and were only slightly higher in late November, despite the 25 basis point rate cut at the November FOMC meeting. Longer-term interest rates continue to ignore the short end of the rate curve.
The iShares 20+ Year Treasury Bond ETF (TLT) is a highly liquid product tracking long-term U.S. interest rates.
Long bonds decline
The U.S. Federal Reserve began cutting the short-term Fed Funds Rate in September 2024. While short-term rates declined, long-term rates moved higher.
The daily chart highlights the decline in the U.S. 30-year Treasury Bond futures contract from 127-22 on September 17 to the latest 115-09 low on November 18. At 118-12 in late November, the long bond remains not far from the recent low, with thirty-year U.S. interest rates not far below the high. While the bonds have recovered since the November 18 low, the bottom line is that in late November 2024, the Fed easing has yet to filter through to the long end of the interest rate curve.
The trend in the TLT ETF remains bearish but could be bending
The iShares 20+Year Treasury Bond ETF product (TLT) tracks the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.
The daily chart of the TLT ETF illustrates the 12% decline from $101.64 on September 17 to $89.42 per share on November 18. At below $93 in late November, the TLT closer to the recent low but the path of least resistance is attempting to turn higher since the November 18 low.
The reasons why long-term rates are not falling
The following factors have weighed on U.S. government debt securities further out on the yield curve, keeping interest rates high:
- The rising U.S. national debt at the $36 trillion level has lowered the full faith and credit in the U.S. government’s financial position.
- At a 4.625% midpoint, the Fed Funds Rate means that funding the deficit is an over $1.65 trillion annual expense. Even if government spending equals receipts, the debt will grow because of the funding cost.
- Political division within the U.S. causes uncertainty, which increases interest rates.
- While inflation has declined, it has not reached the central bank’s 2% target.
- Geopolitical tensions have increased funding rates and created trade barriers.
The bond market has told us that the Fed’s shift to an accommodative monetary policy approach has not been enough to lower longer-term interest rates.
The reasons I believe rates will fall
On November 5, 2024, the U.S. voted to change its political path. A second term for President-elect Donald J. Trump means a dramatic policy reversal over the coming months and years. The following factors could lead to a decline in longer-term interest rates:
- The incoming President has pledged to tap U.S. energy sources to create energy independence and make the U.S. the world’s leading exporter of traditional energy, including oil and gas. Lower oil prices should lower inflationary pressures as energy is a critical input in all goods and services.
- President-elect Trump plans to cut government waste via a Marshall Plan for efficiency. Lower government expenditures will reduce the debt over time.
- Settlement of current issues on the geopolitical landscape could remove trade barriers and sanctions. While the President-elect has pledged to use tariffs as an economic weapon, threats of tariffs could be a negotiating tactic to achieve more balanced trade agreements.
- President-elect Trump favors low interest rates, and his appointments are likely to follow policy paths that reduce long-term rates.
- The financial community has embraced Scott Bessent’s nomination as the Treasury Secretary, which is critical for full faith and credit in the U.S. government bond market.
The Fed Funds Rate rose from zero percent in March 2022 to a high at a midpoint of 5.125%. The first 75 basis points of rate cuts have not lowered long-term bond yields. Still, the odds favor lower rates if monetary policy easing and government fiscal policies leading to smaller government, lower energy prices, and increased revenues from energy exports succeed.
Buying TLT on a scale-down basis
I favor buying the TLT ETF at the current price level of around $93 per share, leaving room to add on further declines. Current interest rate levels favor investors, while they curtail economic growth. Stimulating growth is likely the incoming administration’s goal.
The TLT’s weekly five-year chart shows that the ETF made lower highs and lower lows from the 2020 peak to the October 2023 low. The last lower high of $100.57 was in late December. The ETF rose slightly above that level to a $101.64 high in September 2024, which could eventually be a technical sign that the bearish trend is ending. TLT has not reached a lower low than the October 2023 $82.42 per share bottom.
A move above the $101.64 level would signal a technical reversal over the coming weeks and months. The Fed has signaled that it will cut rates another 25 basis points by the end of 2024, and the dot plot points to 100 basis points lower in 2025, leading to a 3.375% Fed Funds Rate by the end of next year. Lower short-term rates and fiscal policies that reduce government spending and increase revenues could curb inflation, pushing long-term rates lower and the long bond and TLT ETF higher.
