By The iShares 20+ Year Treasury Bond (TLT) and the Vanguard Long-Term Treasury ETF (VGLT) ETFs have slipped this year, which may continue in February. The VGLT fund traded at $55.67, down by 11% from its highest level in December last year. Similarly, the TLT fund traded at $87.76.
Federal Reserve decision
The TLT and VGLT ETFs retreated after the Federal Reserve delivered its first interest rate decision of the year.
In it, the bank decided to leave interest rates unchanged between 4.25% and 4.50% as it continues its battle against inflation.
The Fed also hinted that it will hold interest rates steady at this level for a while as it watches trends on inflation.
Economists expect that the Fed will hold interest rates steady for a few months. The CME FedWatch tool estimates that the first interest rate cut will happen in July this year, followed by another one in December.
The Fed is concerned that inflation will remain high for a while. US data showed that personal consumption expenditures (PCE) rose slightly in December. The headline and core figures remained above the Fed target of 2.0%.
Donald Trump’s tariffs
US inflation will likely remain high in the next few months after Donald Trump imposed large tariffs on imported goods from China, Mexico, and Canada. The US will charge a 25% tariff on Canadian and Mexican goods, and 10% on those from China.
Trump cited the substantial number of undocumented migrants from Canada and Mexico. He also cited the drug inflows from these countries.
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However, Trump is mostly concerned about the substantial trade deficits the US has with these countries.
His view is that by imposing tariffs, many companies that do a lot of business outside of the US will move back their plants to the country.
The reality, however, is that companies will simply raise prices on imports because of the complexities of doing business in the US. For example, the US has a minimum wage of $7.25 a hour, while many workers in countries like China and Bangladesh earn that amount a day.
These factors impact the TLT and VGLT ETFs, which track US long-term government bonds. As the tariff threat occurred, 30-year government bond yields rose to 4.80% on Friday. Similarly, 10-year and 5-year yields continued rising.
These yields may rebound in the next few weeks now that the odds of Federal Reserve interest rate cuts have fallen.
TLT ETF outlook
The weekly chart shows that the TLT ETF has struggled in the past few years. It peaked at $158.70 in March 2020 and has dropped to the current $87.76.
The ETF has remained below the 50-week Exponential Moving Average (EMA) and the 23.6% Fibonacci Retracement level. It has also fallen below the key point at $95.80, its lowest levels in 2016 and 2018.
Therefore, the path of the least resistance for the TLT fund is bearish, with the next point to watch being at $78.35, its lowest level in 2023, down by 11% from the current level. The same is true with the VGLT, which may drop to an all-time low of $50.
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