The 20+ year US Treasury ETF trade is back on the table

In late 2023, we wrote about the opportunity in long-dated US treasury ETFs and the trade to be had on the reset of US interest rate expectations.

At the time, US yields were near multi-year highs and we were still in the grips of inflation fears. However, markets began to price in March 2024 interest cuts in October 2023 and yields started to fall.

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This sparked a substantial rally in 20+ year US Treasury ETFs. Importantly, the Fed has not cut rates yet and the ETF prices have again declined.

Investors now have a similar opportunity in 20+ year US debt, albeit not as great as in October last year. 

Resilience in the US economy meant the Federal Reserve didn’t cut rates in March, and a hotter-than-expected CPI reading last week has pushed back expectations of the first rate cut to September this year.

Bond yields reacted accordingly, and the prices of 20+ year Bond ETFs fell. The decline has brought the ETFs that track this area of the treasury market back to the level that again looks attractive for an entry.

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The Federal Reserve will eventually cut interest rates, and yields will come back down again. This is the thesis for the trade in its simplest terms.

However, the timing of the move will not be entirely straightforward. Timing markets never is and is a particularly tricky pursuit.

Yields could still go higher this year if US CPI remains above 3% and the US economy hums along as it has been. Interest rate cuts could be pushed beyond September. There is also an election to consider.

That said, the iShares 20+ year US Treasury Euro hedges ETF (DLTE) has a yield of 4.7% currently, which is ample compensation to wait for any capital appreciation from the ETF, should interest rate cuts be pushed even further into the future.

There are similar ETFs from other providers available.

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