2022 was one of the worst years in history for the bond market. That year, the Total Bond Index, which measures the performance of U.S. investment-grade bonds, was down 13%. Going back to 1972, the previous worst 12-month period was in 1980, when the index fell 9.2%.
In 2022, the Fed fought inflation by raising interest rates at an incredibly aggressive clip, and the result was a deep bond market correction that investors have yet to fully recover from.
Since then, the environment hasn't changed much. The artificial intelligence (AI) boom has kept investors focused on stocks, and an inflation rate that still isn't back to the Fed's 2% target has prevented yields from dipping too far. The 10-year Treasury yield has been stuck in roughly the same place for the past two years.
But it looks like the narrative may finally be starting to change.
Some big Wall Street banks are starting to sound warnings about the high valuation of tech stocks. The labor market looks like it's finally starting to run out of gas. And the futures market is still pricing in expectations for up to three more Fed rate cuts by the end of 2026.
In other words, the forces that have kept bond yields elevated and total returns stagnant might finally be breaking down.
How quickly is the macro backdrop turning and is now the time to start rethinking the iShares 20+ Year Treasury Bond ETF (TLT 0.24%) for your portfolio? This exchange-traded fund "seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years."
The setup: Sluggish job growth and falling rates
Investors have largely focused on the good instead of the bad in 2025. They've got the data to back it up, too. Annualized gross domestic product (GDP) growth is still running north of 3% and S&P 500 companies are on pace to report 12% year-over-year earnings growth.
For all the talk about slowdowns and recession, the economy still seems to be in pretty good shape.
But don't ignore the growing list of contradictory data, especially on the jobs front.
The labor market had been one of the things supporting this bull market cycle throughout. Job growth remained healthy and the unemployment rate was hanging around historic lows.
Now, that's starting to change. Job growth has flattened and jobless claims are on the rise. The ADP employment report, which measures private-sector jobs, has shown a month-to-month decrease in three of the last five months. That's after averaging around 100,000 jobs added per month over the past several years.
A slowdown in hiring can mean that companies are less optimistic about where economic conditions are headed. For workers, a sluggish jobs market could mean that they feel less secure and decide to pull back on spending.
A slowing labor market is often a situation that leads to the Fed cutting interest rates to support the economy. Falling rates are good for bonds, and these are the exact conditions that historically favor long-duration Treasuries.
To provide some context, a fund's "duration" is a measure of rate sensitivity. Based on its composition, TLT currently has a duration of around 16 years. This means that for every 1 percentage point decline in interest rates, the share price could, in theory, rise by about 16%.
If we're heading into a cycle of lower rates, the longest maturity bonds typically react the strongest. They don't just perform well. They usually lead in bond market performance.
Image source: Getty Images.
Why the TLT ETF is a high-potential trade for falling rates
One of the cleanest ways to position for this environment is through the iShares 20+ Year Treasury Bond ETF. As the name suggests, it invests in a series of Treasury bonds with remaining maturities of at least 20 years. Due to their long maturities, these Treasury bonds become very sensitive to interest rate changes, a good thing when yields are falling.
With $50 billion in assets under management, TLT is one of the largest and most liquid long-term Treasury ETFs around. That keeps trading spreads minimal. The low 0.15% expense ratio also keeps cost of ownership low. Low fees mean more money stays in your pocket!
Add these factors all together and you can quickly see why holding the iShares 20+ Year Treasury Bond ETF can be so promising in this environment (even though Fed rate cuts don't automatically trickle down to long-term Treasury yields).
There's another aspect of government bonds that shouldn't be ignored in this situation: the safe-haven trade. While Treasury bonds can be attractive for economic reasons, they can also be attractive for emotional reasons.
When uncertainty and fear begin to grip the market, investors often turn to Treasuries for safety. This happens because:
- Treasury bonds are among the highest-rated securities in the world and are backed by the U.S. government.
- They come with almost no default risk.
Why long-term Treasuries are looking good now
In short, the bull case for long-term Treasuries is twofold. Slowing labor market conditions and the expectation for cuts from the Fed both support the case for owning Treasury bonds. If investor optimism begins to break down, the desire from investors to seek out safety could further add to the potential upside.
TLT could be one of the biggest potential bond market winners in this situation. It hasn't fully happened yet, but this is exactly the kind of ETF investors want to own before it does.
