Recalling Events from Last September

In recent times, the United States Federal Reserve (Fed) has been making adjustments to its policy stance, with a focus on the labor market taking precedence over inflation concerns. This shift, reminiscent of July-September last year, has caused ripples in the financial markets, particularly in the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT).

Last week's weak jobs report, similar to the weak July report from 2024, has added fuel to the comparisons. The Fed, in its response, made a 25 basis points cut in its key interest rate in 2024, citing concerns about a weakening labor market. This move, described as a "recalibration" rather than a panic move to save the economy, has had an impact on TLT.

The TTM yield of TLT currently stands at a respectable 4.36%. However, the ETF has seen a significant drop over the past few months. In September 2024, TLT's 2024 rally faded quickly, dropping over 16% from a high to a low. This move lower was partially influenced by the upcoming election and the expectation of inflationary policies such as tariffs from a certain presidential candidate.

Despite the recent drop, the author expects TLT to remain in a general $80-100 range for some time. In fact, the author has been long TLT for nearly two years and plans on adding back to their exposure. However, they do not expect TLT to go much past $90 before dipping down again later this year.

The move lower in TLT in the past was not a direct translation of the Fed's actions at the short end. What the Fed does at the short end does not always translate to the same reaction at the long end, as was seen in TLT's response to the Fed's 50 bps cut in September 2024.

The current situation has also seen markets now expecting three rate cuts by the end of the year. The Fed's baseline outlook and shifting balance of risks may warrant further adjustments to its policy stance. Chair Powell's Jackson Hole speech included the phrase "the balance of risks appears to be shifting," indicating a focus on the risk of a weakening labor market.

CPI is expected to rise to 2.9% YoY this week, up from 2.3% in May. Despite this, the focus remains on the labor market, with the unemployment rate during the same period never getting higher than the July reading of 4.3%.

The iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) has recently broken out of a 4-month trading range, above a trendline, and over the 200-day moving average. This breakout could indicate a potential reversal in the ETF's downtrend, making it an interesting investment for those looking for income in a volatile market.