The stock market, or all financial markets, has changed significantly over the past two decades. The main way they have changed is that the concept of individuality has disappeared, whereby assets behave separately and separately from each other. Today, all markets are interconnected in ways that investors must pay attention to if they want a chance at success.
This means that if asset classes like gold or currencies start moving, and their relationships swing from positive to negative or vice versa, investors must be aware of the reasons for this relationship so that they can play accordingly and profit from the swing. .
iShares 20+ Year Treasury Bond ETF Today
iShares 20+ Year Treasure Bond ETF
(As of 12/24/2024 at 05:19 PM ET)
- 52 week range
- $86.98
▼
$101.64
- Dividend yield
- 4.27%
- Assets under management
- $57.05 billion
For this reason, in today’s changing market to take advantage of the potential long trade in bonds is essential.
More specifically, there are three main reasons investors should consider iShares 20+ Year Treasure Bond ETF Nasdaq: TLT For the coming months and quarters, especially as price action in other asset classes sensitive to inflation and interest rates shows them how brighter the future may look for bond prices.
With that in mind, this is the number one reason investors should consider an exchange-traded fund (ETF) for their investment portfolio.
Slowing inflation calls for bond adjustments
The way the iShares 20+ Year Treasure Bond ETF has sold off over the past couple of months is completely uncorrelated with the current business environment. While some asset classes and stocks, such as consumer discretionary names, have behaved in a way that may indicate inflation, fears of rising prices and costs are not present today.
The latest inflation measures that the Fed takes into account, e.g Personal consumption expenditures and Producer price index indicatorsIt is the opposite of what these stocks call for. This is why the price of gold has seen a significant decline, along with other inflation-sensitive assets such as crude oil and its declines.
Why are inflation-driven commodities falling from their highs if inflation is the driver behind the bond sell-off? Since this doesn’t make much sense, this would build the foundation for the three reasons behind the bullish thesis behind the potential to buy into this bond ETF.
Adjusting bond prices to the actual inflation situation would allow investors to take advantage of the ETF’s risk-reward setting. The downside (i.e. higher prices) is minimal compared to how high prices are (and therefore lower prices).
iShares 20+ Year Treasure Bond ETF (TLT) price chart for Wednesday, December 25, 2024
Small-cap stocks are converging with bonds, so will divergence be next?
Correlations between penny stocks, as seen through iShares Russell 2000 ETF NYSEARCA:IWM The iShares 20+ Year Treasure Bond ETF, rose to a league high. This means that their price action is now converging, with the two asset classes essentially falling over the past few weeks.
What naturally emerges from this convergence is the breakdown of the correlation, which expresses itself in the form of divergence between small-cap stocks and bond prices. Essentially, as covered in the previous point, a bond rally is much more likely than a selloff, making this divergence a potential setup that will benefit bonds the most.
It also makes fundamental sense, as small-cap stocks (made up of smaller, local companies) cannot diversify costs or cycles as effectively as large-cap stocks can. Slowing inflation and business activity will likely keep small stocks lower while bonds rise, thus lowering yields.
Then, as correlations return to cycle lows and yields fall to reflect easing inflation and Fed cuts, the environment will be friendlier to allow small stocks to rise again and converge to the upside with bonds.
Energy stocks expected to boom, are bonds bullish?
Warren Buffett took the lead in the energy sector when he recently bought up to 29% of its shares Occidental Petroleum Company New York Stock Exchange: OxyBecause he knows what a bond bottom could bring next. As the inflationary slowdown affects small businesses, it also affects oil demand and prices.
However, once these interest rate cuts trickle down to the rest of the economy, rising bonds and lower yields will not only help small businesses, but will also boost overall business activity in the broader market. This is when demand for oil can come back into play, boosting the price of the barrel and related stocks.
Correlations between bonds and Power box for selected sector SPDR NYSEARCA:XLE Show this theme in play. Convergence does not make any sense, as these assets are usually negatively correlated. A natural divergence from here would favor a bond rally before an oil rally comes, giving investors a third way to justify buying into ETFs.
Before you consider the iShares 20+ Year Treasury Bond ETF, you’ll need to hear this.
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If a company’s CEO, COO, and CFO were all selling shares of their stock, would you want to know?
