Long-duration Treasury bonds, which are an important part of many investment portfolios, have recently recovered from a bear market that started in August 2020. This downturn caused a significant decrease in value, with a maximum drawdown of over 50% at its lowest point.
The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), the main ETF linked to Treasury bonds and a widely-tracked indicator of long-term Treasury performance, has officially entered a bull market after a impressive 20% rally from its October lows.
TLT Enters A Bull Market: What Comes Next?
The sudden decrease in yields on 30-year bonds from 5.2% to the current 4% over the past two months has been a key factor in the bond’s price rally. This has been driven by various factors, including a continued slowing down of inflation and the Federal Reserve’s very dovish stance.
During the end-of-year Federal Open Market Committee (FOMC) meeting, the committee hinted at the possibility of a 75 basis point rate cut in 2024, according to their ‘dot plot’ projections. However, the market, always looking ahead, appears to be anticipating an even more aggressive rate cut scenario.
The Dynamics of Bond Performance
Bonds typically perform well in environments with declining interest rates, as lower yields tend to increase the value of fixed-income assets.
In the context of bonds, an economic downturn in 2024 could create an even more favorable situation as it would put pressure on the Federal Reserve to lower interest rates.
The performance of U.S. Treasuries in 2024 will largely depend on the Federal Reserve’s willingness to lower interest rates. The timing of any rate cut will depend on how quickly inflation reaches its 2% target and the likelihood of the Fed starting interest rate reductions.
Technical Analysis: TLT ETF at an Important Point
From a technical standpoint, the TLT ETF is currently at a crucial juncture, testing the important range between $99 and $100 per share. This level has served as strong technical support on multiple occasions over the past year before experiencing a sharp drop in August.
Furthermore, the TLT has recently broken above the 200-day moving average, which is a significant technical resistance level that had held steady since January 2022, with a few false breakouts in April of this year.
However, amidst these positive technical factors, it is important to keep an eye on another significant signal. The daily Relative Strength Index (RSI), a key indicator for measuring trend strength, has now risen above the 70 level, entering the overbought zone.
In previous instances, when the TLT ETF reached an overbought technical level, it often coincided with price peaks followed by bearish price action, indicating the need for caution as we approach the new year.