The TLT May Be Heading Much Lower Amid A Higher Neutral Rate (NASDAQ:TLT)

The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) may have further to fall as rates on the long end of the curve march higher and are now showing signs of breaking out. The higher rate should translate into a move lower in the TLT, as the US economy stays more resilient than economists and market analysts forecast.

The Atlanta Fed GDPNow forecast sees first quarter growth at 3%, while first-quarter PCE is tracking at 3.6%, implying a 6.6% nominal growth rate seasonal adjusted annualized growth rate. That would be significantly stronger than the 4.8% nominal growth seen in the fourth quarter.

Higher Neutral Rate

This stronger economic growth has many Fed officials now talking about a higher neutral rate for the economy, which could imply where the Fed funds rates end up and, more importantly, the entire yield curve. Historically, the 30-year rate tops around 400 basis points higher than the overnight Fed Funds rates. This could suggest that even a Fed Funds rate that ultimately settles around 2.5% to 3% could mean that the 30-year rate ends up settling somewhere between 6.5% to 7%.

It sounds unimaginable, but since 1980, when the yield curve has steepened, it typically has 400 basis points, where the spreads stop rising. Even with all of the easing that the market has priced in, Fed Funds futures see the overnight rate of 3.25% by the summer of 2026. At a spread of even 200 bps, the 30-year rate should trade for over 5.25% from its current 4.38% level on February 9.

TLT Technical Take

That would easily push the 30-year rate close to its October 2023 highs, and the TLT would likely trade back toward those October lows of below $85.

Certainly, a case could be made for a lower TLT using technical analysis. The chart clearly shows that the TLT is now sitting on a critical level of support at $93, which, if broken, could result in the TLT starting a decline that could ultimately take it back to fill a gap of around $85 from November 2.

It’s visible that the TLT’s relative strength index has reversed from rising to falling, suggesting that momentum in the ETF has flipped from being bullish to being bearish.

However, if the TLT doesn’t fall below support at $93, the ETF could rebound from its current levels and move higher back towards resistance at $98. The big risk preventing a move lower and rallying back to $98 could be a favorable CPI report.

But currently, it seems like as long as the overall economy stays healthy, the job market remains strong, and even if inflation falls back to target, the argument for not cutting rates will grow louder: If the policy was too tight, then the economy should slow, and if it’s not slowing, it’s an easy signal that the economy’s neutral rate is higher than thought. And that would argue for rates on the back of the yield curve going higher from current levels and the TLT going lower.