TLT: Long Bonds Signal Peak Inflation (NASDAQ: TLT)

Kameleon007

Bonds are the first asset class to perform well as the economy slows towards a recession. Market moves after Wednesday’s record 9.1% CPI suggest the Treasury market is pricing in a recession and reduce inflation expectations.

More specifically, the recent uptrend for bonds and downtrend for commodities means that the Treasury market expects the Fed to raise interest rates until inflation is definitely broken. Therefore, the market warns of an imminent threat disinflationary recession.

If this happens, the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) has the potential to rise 100% as equity, commodity and housing prices decline further.

TLT Technical Analysis

Looking at the price action over the past few days, TLT appears to be starting a new uptrend. After a 7-month downtrend and a 1.5-year bear market, TLT now has immense upside potential.

TLT: USD - 1D

TLT:USD – 1D (TrendSpider)

Notably, TLT moved higher (+2.8%) on June’s record high CPI inflation print on Wednesday 07/13/2022. In our view, this indicates that the Treasury market is expecting a spike in inflation and a recession to begin.

By analyzing the long-term Elliott Waves of TLT, we can see that the ETF bear market (which began in March 2020) may finally have come to an end. Currently, TLT is down about 35% from its all-time high in March 2020.

TLT:USD - 3D

TLT:USD – 3D (TradingView 7-13-2022)

As the price of TLT increases, the likelihood of an economic recession in the United States also increases. During a recession, investors seek safety and turn to high-quality bonds and defensive sectors such as utilities, healthcare and consumer staples.

Currently, macro conditions are properly positioned for a bond rally, and TLT looks set to burst. If TLT retraces its losses from 2022, this will bring the ETF back to $150.

On its monthly chart, TLT is moving in a huge ascending channel between a high of $215-$150 and a low of $100. From this point of view, the moment now seems propitious to begin the periodic purchase by fixed sums of long-term bonds.

TLT: USD - 1M

TLT: USD – 1M (TrendSpider)

Where are we in the economic cycle?

Identification where the market is positioned in the business cycle helps investors determine when the bear market is over and when stocks and commodities become safer to invest in. From a theoretical perspective, the intermarket business cycle predicts the price of bonds, stocks, and commodities as three intertwined waveforms:

Intermarket business cycle

Intermarket Business Cycle (International Review of Economics and Finance (annotated by the author))

  • As the market enters a recession, bonds are on the rise while equities and commodities have the opportunity to fall.

Currently, the cross-market economic cycle is easily observable by comparing the iShares 20+ Year Treasury Bond ETF, the Invesco DB Commodity Index ETF (DBC) and the S&P500 (SPX) against each other:

Intermarket business cycle

Intermarket economic cycle (TradingView 7-14-2022)

Knowing this, investors may consider cycling return into equities during the “recovery” phase of the business cycle, i.e. when the recession ends and bonds begin to refinance. Then later, as the economy “expands” and growth picks up, commodities come back into favor again.

Risk

Our belief that long-term bonds are at rock bottom came to fruition following the CPI inflation release on Wednesday. High inflation saw TLT move higher and equities/commodities lower. This price action leads us to believe that the market is entering a disinflationary recession, which is bullish for TLT.

The alternate view of our argument is that inflation doesn’t sharp. Those in this camp should look to hold on to cash to weather the storm.

Take away key

As the risk of recession increases, long-term bonds may rise while equities and commodities may fall.

Garland K. Long