One instrument of choice to profit from in a stock market sell-off is to buy the iShares 20+ Year Treasury Bond ETF (TLT), which is a pure play on lower long-term Treasury yields as the flight to safety puts tremendous downside pressure on long-term interest rates, suggests income expert Bryan Perry, editor of Cash Machine.
It should also be noted that longer-term bonds are more price sensitive to interest rate movements and guidance from the Fed. And investment in TLT shares seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index (the "underlying index").
The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than twenty years. The fund has an expense ratio of 0.15%.
This is the only ETF that offers exposure to longer-term treasury bonds. In fact, out of all ETFs offering exposure to the Treasury market, TLT has the highest average trading volume of 9.06 million. This makes it easier to buy and sell shares in the ETF, thereby lowering the liquidity risk when investing in the fund.
I believe that current Fed policy will keep short-term treasury yields higher, and increase market expectations of a potential recession in the future, which will cause longer-term yields to fall. In this case, this would support the inversely correlated long-term bond yields higher, and consequently allow the TLT ETF to rally higher.
The Fed did not lower its projections as much as the markets expected. For instance, they stated they would lower their projections from three to two rate hikes for 2019, which upset markets that were trading on the notion of preparing for no rate hikes at all next year.
When long-term Treasury bond yields were at their lowest in mid-2016, shares of TLT traded as high as $144. Today, they trade at $121, or 19% lower. It’s my position that market sentiment toward long-term rates moving lower will continue to rise, and with it, the price of TLT shares will appreciate as well.
Slowing global growth, political instability and fear of capital erosion have gripped the market. TLT is one way to put a floor under further downside risk.
