The largest long-dated bond ETF is suffering its biggest drawdown on record as the Federal Reserve’s higher-for-longer interest rates start to sting.
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The $39 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has lost 48% from its 2020 all-time high and is trading at its lowest point since 2011, according to data compiled by Bloomberg. At the same time, IHS Markit Ltd. data show that bets against the fund have risen, with short interest as a percentage of its shares outstanding at its highest in about a month.
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“It’s all about interest-rate expectations — inflation ignited a major move higher, and that along with a stronger-than-expected economy means rates continue to trend higher,” said Todd Sohn, ETF and technical strategist at Strategas Securities. “There’s also the possibility of further hikes, so that hurts anything with any duration on it.”
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Investors have been adjusting to the reality of what the Fed has been messaging for a while: that rates will stay higher for longer.
The central bank reiterated last week that it sees borrowing costs remaining high next year, given the strength of the US economy. In projections, 12 out of 19 officials signaled that they see yet another rate hike this year and forecast fewer cuts than had been previously anticipated. In this environment, yields on long-dated US debt have gone sharply higher — the 30-year yield on Monday rose as much as 12 basis points to 4.64%, a level not seen since April 2011.
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Read more: Treasuries Extend Selloff, Pushing 10-Year Yield to 16-Year High
To Zachary Griffiths at Creditsights, the big upward move in long-term Treasury yields can be tied back to early August, when Fitch Ratings downgraded the US credit rating and the Bank of Japan unexpectedly tweaked its policy. These and other factors pushed real yields higher.
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“More recently we think the additional selloff came from the September FOMC meeting decision in which policymakers indicated they expected economic growth to be even higher in 2023 (2.1% vs 1.0% in the June SEP) and rates to remain higher for longer,” said Griffiths, a senior fixed-income strategist.
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“Rates markets are pricing in fewer rate cuts over the next couple of years on the back of this move which has pushed yields across the curve higher, not just at the very front end.”
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TLT has dropped roughly 10% so far this year, which follows a 33% plunge last year and a 6% drop in 2021. Other long-duration funds have also suffered, with the Vanguard Extended Duration Treasury ETF (EDV) down 14% in 2023, and the PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ) off by more than 15%.
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“The trend in bonds is firmly lower,” Jonathan Krinsky, chief market technician at BTIG, wrote in a note last week. “At some point we continue to expect long rates to head lower as the effects of ‘higher for longer’ take their toll on the economy. At that point we would expect rates down with stocks down, something we haven’t seen much of this year.”
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The flagship 30-year mortgage average dropped back almost a tenth of a point Friday from the historic 22-year peak it touched the day before. Rates for most other mortgage types also moved lower Friday, with only two averages rising.
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The latest 30-year fixed-rate average is 7.83%. Because rates vary widely across lenders, it's always smart to shop around for your best mortgage option and compare rates regularly, no matter what type of loan you're shopping for.
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Today's Mortgage Rate Averages: New Purchase
Rates on 30-year new purchase mortgages dropped back 9 basis points Friday, after Thursday bolting up 22 basis points to register their highest level since at least 2001. The current average is down to 7.83% vs. Thursday's historic mark of 7.92%.
When Freddie Mac released its weekly mortgage averages Aug. 24, it revealed that 30-year rates had hit a 22-year high. The Freddie Mac average that week was 7.23%, its highest reading since June 2001. The current average is slightly lower at 7.19%.
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Freddie Mac. “The 30-Year Fixed-Rate Mortgage Reaches its Highest Level in Over Twenty Years.”
Freddie Mac’s averages differ from the averages we publish here due to Freddie Mac calculating a weekly average that blends five previous days of rates, and which may include loans priced with discount points. In contrast, Investopedia’s averages indicate daily rate movement and only include zero-point loans.
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Rates on 15-year loans, meanwhile, were flat Friday, keeping the average at a 21-year peak of 7.17%. The 15-year average also recorded that high-water mark on Aug. 22.
After reaching a new historic record of 7.15% last week, the jumbo 30-year average declined 13 basis points Friday to return to 7.02%. Though daily jumbo averages are not available before 2009, it's reasonable to assume that the 7.15% reading was the most expensive level for jumbo 30-year loans in 20 or more years.
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The only new purchase averages to gain ground Friday were the FHA 15-year average, which climbed a tenth of a point, and the 5/6 ARM average, which moved 7 basis points higher.
Refinancing rates were a bit more mixed Friday than their new purchase cousins. The 30-year refi average dropped a more dramatic 15 basis points, narrowing the gap between 30-year refi and new purchase rates to 32 basis points. Jumbo 30-year refi rates meanwhile dropped by the same 13 basis points seen in its new purchase counterpart.
The 15-year refi average was one of several to hold flat or nearly flat Friday, while the day saw a 10 basis point gain in the VA 30-year refi average and a spike of 22 basis points in the 5/6 ARM refi average.
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