I think TLT and ZROZ have further to fall considering that we're only 3.25% of the way to a 4.75% to 5% predicted terminal rate on overnight rates. Not all of that change will make it into long-duration bonds like TLT and ZROZ represent, and in fact we're likely to invert the FFR vs. the 10 year yield by about 0.5%, but that still leaves 100-125 basis points to go on longer-duration treasuries. There could be lots more pain ahead for TLT. Check out the Taylor Rule for why. The Fed is going to have to raise short term rates above the level of inflation to push inflation down. We're still in stimulative territory.
The reason to own TLT NOW is if you want to place a leveraged bet on the shit hitting the fan... hard... like 2008-style. Think banks collapsing, nobody buying anything, jobless people getting foreclosed upon, and people jumping from skyscrapers bad. In that scenario, the Fed would cut rates very fast and TLT would rocket back upward. Your stocks would lose another 30-50% but your TLT would do great.
This hedging opportunity is offset by the alternative risk that TLT keeps losing value as the Fed hikes rates to 4%, then 5%, then 6%, then 7%... trying to catch up with raging inflation. That scenario would represent a repeat of the devastation experienced in 2022.
So which scenario is more likely? I think the first one is more likely, but not by enough to justify the risk of holding TLT. If I was you and holding TLT, I'd GTF out. I might then consider buying the longest-duration LEAPS call options on TLT or ZROZ as insurance against a financial crisis that would cause rapid rate cuts. In fact I'm keeping an eye on this play as an idea if we start seeing markets freeze up, joblessness go up quickly, etc.
For TLT, I'd look at buying the January 17, 2025 call options at the $100 strike which last sold for around $12.55 (so 100/12.55= nearly 8x leverage with a firm limit on downside risk). I expect this would do well in a repeat of the 2008-2009 financial crisis scenario, or even a repeat of the aborted 2016-2018 rate hiking campaign. This option also has enough duration that you can hold it for a while, waiting for events to unfold over a span of many months, and selling the options when the rate cuts are done and there's still time value. Yes, it is possible to lose 100% of this investment, but that amount is a lot less than what remains at risk if you take a comparably-sized long position in TLT.
