Top Picks 2018: iShares Barclays 20+ Year Treasury Bond ETF (TLT)

01/22/2018 5:00 am EST


Landon Whaley

Editor, Gravitational Edge

My assessment of markets begins by evaluating the three most critical forces, or gravities, that impact asset prices: fundamental, quantitative, and behavioral. I call this my Gravitational Investing Framework, explains Landon Whaley editor of Focus Market Trader.

As we begin 2018, all three gravities are beginning to shift bullish for long-dated U.S. Treasuries, indicating that this market is one of the best long opportunities of the next year.

To trade this bullish development, consider being long U.S. Treasuries via the iShares Barclays 20+ Year Treasury Bond ETF (TLT).

Fundamentally, long-dated U.S. Treasuries have two bullish tailwinds working in their favor.

First, U.S. economic growth has been accelerating for 17 months, which is a duration that is very meaningful. Since 2009, we have experienced three phases of U.S. growth accelerating and three phases of growth slowing.

The previous three growth-accelerating phases averaged 14 months, and the three growth-slowing phases had exactly the same average duration. Symmetry, anyone?

From a very recent historical perspective, the current regime has overstayed its welcome. By the time we enter 2018, the duration will be approximately 25% beyond previous similar economic regimes, which means a growth-slowing regime is just around the corner.

Second, we’ve just had our fourth Fed rate hike in the last twenty-four months. This is a critical fundamental development for U.S. Treasuries. Most investors believe that Fed rate hikes push yields higher.

However, history has shown us that exactly the opposite occurs in the immediate aftermath of a hike in U.S. interest rates, and yields typically fall.

Quantitatively, the iShares Barclays 20+ Year Treasury Bond ETF behaves in fairly predictable manner in the time period immediately after a Fed rate hike.

Since the first hike on December 15, 2015, there have been three additional hikes: December 14, 2016, March 15, 2017, and June 14, 2017. In the six months following each of these hikes, TLT’s reward-to-risk statistics has been very favorable, averaging a 7.9% return, with an average drawdown of just − 4.5%.

That’s nearly two times as much upside potential as downside risk. That’s not a bad return for just six months of work!

Behaviorally, investors have recently yanked close to $1B from the four largest Treasury exchange-traded funds. In fact, the iShares Barclays 20+ Year Treasury Bond ETF, has seen outflows of over $500MM in the last month alone.

This tells me that investors are blissfully unaware that this current U.S. growth cycle is long in the tooth and will likely reverse itself during 2018.

These ETF outflows also tell me that investors are still buying the misconception that a Fed rate hike pushes U.S. yields higher. But as the quantitative gravity has shown us, investors don’t sell bonds in response to rate hikes; rather, they gobble them up.

To play this trade idea, use the iShares Barclays 20+ Year Treasury Bond ETF to invest in long-dated U.S. Treasuries, which are my Top Pick for conservative investors.

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