Is it possible for a poorly performing asset to attract billions of dollars in investor inflows? According to Scott Opsal of the Leuthold Group, the answer is yes. Opsal draws an interesting parallel between the phenomenon of meme stocks and the unexpected popularity of the iShares 20+ Year Treasury Bond ETF (TLT), a fund that has experienced significant losses despite its attraction of mega inflows.
In a year where TLT returns have been nothing short of “frankly terrible,” the index fund has managed to secure over $20 billion in new assets. Opsal points out the astonishing fact that TLT has seen a cumulative return of -48% since rates hit rock bottom in 2020, making it an unimaginable loss for a security traditionally perceived as low risk. To put this into perspective, the S&P 500 index has witnessed a nearly 33% gain over the same period, taking place during a bear market in stocks and the Federal Reserve’s most aggressive rate-hiking cycle in four decades.
Opsal sees similarities between meme stocks, which gained popularity due to their potential for price recovery, and TLT’s recent surge in investor inflows. However, there’s an important distinction to be made – unlike meme stocks, Treasury securities are backed by the U.S. government and are guaranteed to be fully repaid if held to maturity.
BlackRock, the overseer of TLT and a suite of bond ETFs, attributes the continued flows into TLT to investors positioning themselves for a possible economic slowdown and anticipating a more normalized yield curve in the future. The largest holders of TLT are wealth platforms and longer-term asset allocators, as well as investors who strategically balance their Treasury allocation with both short- and long-duration exposures.
TLT, a passively managed fund, seeks to track the performance of a benchmark index composed of Treasury bonds maturing in 20-plus years.
While TLT’s popularity amidst its poor performance may raise eyebrows, it serves as a reminder that investor behavior can sometimes defy conventional wisdom.
Trouble in the Treasury Market
The Treasury market, which is valued at approximately $26 trillion, has been facing difficulties due to discussions surrounding higher interest rates. Specifically, the prices of older, low-coupon bonds have been negatively impacted. If holders are forced to sell these bonds at a discounted price, losses are realized. This situation played a role in the collapse of Silicon Valley Bank in March.
According to Leuthold, it can be argued that TLT (an exchange-traded fund focused on longer-term Treasury securities) resembles a meme stock. Investors flocked to TLT as its net asset value dropped from a peak of $161 a few years ago to as low as $83 in late October.
However, there has been some recovery since then. The fund’s net asset value now stands at approximately $89.72, based on the latest data from FactSet. Interestingly, this recovery coincided with a decline in the 10-year Treasury yield BX:TMUBMUSD10Y in November. It currently sits at around 4.5%, having reached a 16-year high of 5% the previous month.
Despite the challenging environment caused by the rise in the 10-year Treasury yield, investors have begun looking to add duration to their fixed income portfolios at today’s higher rates.
Read: Why a derailed $11 trillion corporate bond market looks ripe for a comeback as U.S. inflation slows
According to Opsal’s analysis, the bounce back in November has provided some relief to investors who have suffered losses due to significant inflows totaling billions of dollars into TLT over the past two years. These investments have consistently been underwater.
There is optimism among many investors that the policy rates set by central banks may now be approaching a peak. The Federal Reserve has kept its rates unchanged at a 22-year high of 5.25% to 5.5% since July. Furthermore, with inflation showing signs of easing, there is speculation in the market about potential rate cuts by the Fed in the coming year, even if they are only modest.
This market backdrop has resulted in the S&P 500 index rising by 17.3% year-to-date as of Wednesday. The Dow Jones Industrial Average DJIA has seen a 5.6% increase, while the Nasdaq Composite Index COMP has surged by 34.8% in 2023, based on data from FactSet.