If interest rates are cut by 1%, it would likely have a positive impact on a fund that holds long term bonds like the TLT. Here’s why:
Bond prices tend to rise: When interest rates are cut, the prices of existing bonds with higher interest rates become more attractive to investors. This is because the interest rate on these bonds is now higher than the prevailing market rates, making them more valuable. As a result, the prices of long-term bonds tend to rise when interest rates are cut.
What Happens When Interest Rates are Cut by The Fed?
Bond yields tend to fall: The yield on a bond is the return an investor receives on their investment, expressed as a percentage of the bond’s face value. When interest rates are cut, the yield on existing bonds with higher interest rates becomes more attractive to investors, which can lead to a decrease in bond yields. This means that long-term bonds may offer lower yields after an interest rate cut, as investors are willing to accept lower returns on their investment.
Longer-term bonds are more sensitive to interest rate changes: Long-term bonds are generally more sensitive to changes in interest rates than short-term bonds. This means that when interest rates are cut, the prices of long-term bonds may rise more than the prices of short-term bonds. However, if interest rates rise in the future, long-term bonds may experience larger price declines than short-term bonds.
Bond funds to consider with rate cuts looming.
iShares 20+ Year Treasury Bond ETF (Ticker: TLT): This ETF seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index, which is comprised of U.S. Treasury bonds with remaining maturities greater than 20 years. As of April 2023, the management fee for TLT is 0.15%.
Vanguard Extended Duration Treasury ETF (Ticker: EDV): This ETF invests in U.S. Treasury bonds with maturities greater than 20 years and less than 30 years. The fund aims to track the performance of the Bloomberg Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. As of April 2023, the management fee for EDV is 0.07%.
Schwab Long-Term U.S. Treasury ETF (Ticker: SCHQ): This ETF invests in U.S. Treasury bonds with remaining maturities greater than 10 years. The fund aims to track the performance of the Bloomberg Barclays U.S. Long Treasury Bond Index. As of April 2023, the management fee for SCHQ is 0.06%.
SPDR Portfolio Long Term Treasury ETF (Ticker: SPTL): This ETF invests in U.S. Treasury bonds with remaining maturities greater than 10 years. The fund aims to track the performance of the Bloomberg Barclays U.S. Long Treasury Index. As of April 2023, the management fee for SPTL is 0.06%.
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (Ticker: ZROZ): This ETF invests in U.S. Treasury bonds with remaining maturities greater than 25 years and that pay no periodic interest. The fund aims to track the performance of the ICE BofA 25+ Year US Treasury Zero Coupon Index. As of April 2023, the management fee for ZROZ is 0.15%.