Long-term treasuries

The iShares 20+ Year Treasury Bond ETF (TLT) is a primary vehicle for those seeking exposure to long-duration U.S. government debt. Often considered a "safe haven" asset, TLT's performance is deeply intertwined with interest rate expectations and the broader economic cycle.

This article examines the historical relationship between long-term treasuries and economic recessions, as well as the technical patterns that could signal a turnaround.

TLT Price Action

Long-term treasuries like VUSTX usually go up before and during a recession

Historically, long-term treasuries (represented here by VUSTX as a long-term proxy) exhibit a strong tendency to rally as lower interest rates are anticipated and the relative security of government bonds is sought. Identifying where TLT stands in the current cycle is crucial for determining if the "recession rally" is to happen.

TLT also outperforms the SPX before and during a recession, but otherwise, it spends most of its time underperforming the SPX

The relative performance of TLT against the S&P 500 (TLT/SPX) is another key indicator. Outside of recessionary windows, TLT typically underperforms the broader stock market, which benefits more from economic growth. However, as economic conditions deteriorate, the ratio often flips, with TLT providing significant outperformance during certain periods of time.

in the mid-2000s it usually double bottoms with a slightly lower low on the second time before going higher decisively which has yet to happen if it happens at all

From a technical perspective, TLT's bottoming process can be arduous. Looking back at the mid-2000s, a pattern where the asset forms a double bottom can be observed, often with the second low being slightly lower than the first. Currently, TLT has shown signs of stabilization, but it has yet to produce the decisive lower-low shakeout or the subsequent impulsive rally seen in previous cycles if a second bottom is actually to occur.

Conclusion

TLT remains at a critical juncture. While its historical role as a recession hedge is well-documented, the technical confirmation for a bottom is still developing. The lack of a clear double-bottom pattern similar to the mid-2000s suggests that patience may be required if it actually occurs.

Pitfalls

Keep in mind that this is a dubious speculation that may or may not occur. TLT might be more bullish than the analysis of the article or more bearish depending on how market sentiment evolves in the future. Indicators do not tell the future with absolute certainty. They are useful to reason about the future, and it is important to balance both bullish and bearish scenarios to avoid bias as best as possible. Lastly, all indicators are prone to failure every now and then. They tend to work well for a while, but eventually, some indicators fail, while others do not at a given time. As more data comes in, the analysis will evolve to incorporate new moves, invalidate a previous hypothesis or gain evidence for a previous idea.

In this analysis, the TLT/SPX ratio was examined. While this is helpful to understand how an individual asset performs against something else, the interpretation of TLT/SPX allows for multiple scenarios to occur. Since TLT and SPX are moving too, the final outcome of TLT itself and the path it takes are influenced.

For an approximately constant SPX price, TLT/SPX could go lower, because TLT is underperforming SPX (dropping). If TLT/SPX goes higher, then TLT is outperforming SPX by going higher more quickly. Such relative comparisons are tricky at times, and it is important to keep in mind that its interpretation could be more ambiguous.

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Important Reminder

This article is for educational and entertainment purposes only and is not financial advice. Always consult with a qualified financial advisor before making investment decisions, and only invest what you can afford to lose.