iShares 20+ Year Treasury Bond ETF Shows Short-Term Strength Amid Negative Fundamentals

Technical Analysis

The iShares 20+ Year Treasury Bond ETF (TLT) closed at $99.26 on September 19, 2024, reflecting a minor decline of 0.33% from the previous session. The ETF is currently trading above its 50-day moving average of $96.77 and its 200-day moving average of $94.20, indicating a bullish short-term momentum relative to the longer-term trend.

Looking at the relative strength index (RSI) of 60 suggests that TLT is not yet overbought, giving room for potential price appreciation. The volume traded was 39.70 million, surpassing the average volume of 36.83 million, indicating increased investor interest, possibly driven by recent news concerning the Federal Reserve's aggressive rate cut approach.

Key support is established at $98.80, while resistance is placed at $99.56. Given today's decline, TLT needs to hold above the support level to maintain bullish sentiment.

Fundamental Analysis

The ETF is trading at a market capitalization of approximately $62.78 billion, with an EPS of -12.59 and a negative PE ratio of -7.89, likely reflecting the prevailing low interest rates and their impact on bond yields. The negative earnings suggest volatility and potential risks associated with bond investments at this stage. However, the recent Federal Reserve rate cut of 0.50% may enhance the attractiveness of long-term bonds, as they generally appreciate when interest rates decline.

The current environment suggests a favorable scenario for TLT over the short term due to the anticipated effects of the rate cut on bond prices. Market sentiment appears optimistic with TLT experiencing increased inflow, indicating confidence among investors despite its negative fundamentals.

Predictions

For the next trading day (September 20, 2024), TLT could see a potential bounce towards the resistance level at $99.56, especially if market participants seek safety in bonds amid concerns regarding economic conditions. The momentum from the recent Fed rate cut may provide additional support in terms of demand.

For the upcoming week, TLT may continue to perform positively, especially if the market maintains volatility or any economic data releases show signs of potential economic weakening, leading to further inflows into treasury bonds as safe-haven assets.

Intrinsic Value and Long-Term Investment Potential

Determining the intrinsic value of TLT involves evaluating the cash flows generated from its underlying securities (20+ year U.S. Treasury bonds). Given the current low interest rate environment, the intrinsic value may not be high, but for investors focusing on capital preservation and stability, TLT can still play a crucial role in a diversified portfolio.

In the long term, TLT may gain from potential economic downturns where bond prices historically rise. However, the negative EPS and PE ratios raise concerns about sustainability and overall profitability in a low-interest rate environment. Therefore, while TLT presents a defensive investment opportunity, substantial long-term growth may be limited without significant economic catalysts.

Overall Evaluation

Considering all factors, TLT is categorized as a 'Hold' candidate. The recent interest rate cut by the Federal Reserve could lead to a short-term recovery in TLT, bolstered by fading inflation concerns and increased demand for safety. However, its fundamental weaknesses, including negative EPS and uncertain long-term prospects, prevent stronger categorization.

Investors should remain cautious and monitor further economic data, Fed movements, and interest rate trends in determining any shifts in position regarding TLT moving forward.