This Bonds ETF Looks Like An Opportunity

This Bonds ETF Looks Like An Opportunity
Luke Suddards

over 1 year ago1 min

The iShares 20+ Year Treasury Bond ETF (ticker: TLT; expense ratio: 0.15%) provides exposure to US Treasuries with maturities that are more than 20 years out – and right now, there seems to be an opportunity. This chart shows its price relative to its 200-week price average over the past 15 years. A figure higher than 1 means the price is above the average, while a figure lower than 1 indicates it’s below. And at 0.7, the ETF is currently about 30% below the average.

But is 30% good or bad? That’s where statistical measures such as means and standard deviations can help. The red and green lines on the chart represent the standard deviations, while the dotted blue line represents the mean – where TLT’s price has traded relative to its 200-week average over the past 15 years. The red and green lines closer to the mean represent one standard deviation (red is for negative and green is for positive), while the lines farther away represent two. At its current level, the ETF is more than two standard deviations below its average, which is rare and suggests it’s highly oversold. After all, prices do tend to revert to the mean, and you can see that from the previous spikes above the green +2 standard deviation line.

When that might happen is the big question. This ETF is focused on long-duration bonds, the kind that are more sensitive to interest rate and inflation expectations – that’s why it’s fallen from favor lately, and why it’s likely to gain again when inflation has peaked and interest rate hikes wane. Until that happens, you can take some comfort in its chunky dividend yield of 3%.

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