TLT: Revisiting the Term Premium Amidst Equity Market Volatility

The iShares 20+ Year Treasury Bond ETF (TLT) may see a resurgence in safe-haven demand amid equity market volatility. Despite lower rate expectations, TLT's yield has increased due to a rise in the term premium. The term premium reflects the difference between long-term and short-term interest rates and is influenced by market sentiment and economic conditions.

The iShares 20+ Year Treasury Bond ETF (TLT) has been a subject of interest for investors due to its potential to benefit from safe-haven demand amid recent equity market volatility. Despite lower rate expectations, TLT's yield has increased, primarily due to a rise in the term premium.

The term premium, which reflects the difference between long-term and short-term interest rates, has been influenced by market sentiment and economic conditions. According to a recent analysis [1], the term premium has moved sharply higher, indicating growing uncertainty about long-term interest rates. This uncertainty has led to higher yields on long-term bonds, even as long-term interest rate expectations have fallen.

The term premium is a crucial factor in determining long-term yields. It reflects the risk investors are taking by committing to holding long-term bonds. The Adrian, Crump, and Moench (ACM) model, a statistical model used to estimate the term premium on Treasuries, shows that the term premium for the 10-year bond has been positive for much of the past decade [1].

The recent performance of yields amid equity market weakness highlights the power of the term premium. Even significant declines in long-term rate expectations have not been enough to drive down long-term yields if the term premium rises significantly [1].

Long-term investors may benefit from the rising term premium, as it indicates that TLT holders are increasingly being rewarded for the duration risk they are taking. The current yield of 30-year bonds is near multi-year highs, while the average of short-term yields and inflation expectations has dropped significantly [1].

The LEI, a leading economic indicator, has shown signs of economic stress, with the June LEI falling 0.3% after a flat reading in May [2]. This has led investors to anticipate a weakening U.S. economy in the second half of 2025, which could drive demand for safe-haven assets like TLT.

In conclusion, the iShares 20+ Year Treasury Bond ETF (TLT) may see a resurgence in demand as a safe-haven asset amid equity market volatility. The rise in the term premium has led to higher yields on long-term bonds, but the potential for economic uncertainty and safe-haven demand could provide opportunities for long-term investors.

References:
[1] https://seekingalpha.com/article/4803111-tlt-rate-expectations-down-and-yields-up-its-all-about-the-term-premium
[2] https://finance.yahoo.com/news/tlt-surges-weaker-leading-economic-200000016.html