Vanguard Long-Term Treasury (VGLT), and iShares (20+ year Treasury Bond) have both declined this year. This trend may continue into February. The VGLT Fund traded at $55.67. This is down 11% since its peak in December of last year. TLT traded at $87.76.
Federal Reserve decision
After the Federal Reserve announced its first rate decision for the year, the TLT and VGLT exchange traded funds (ETFs) retreated.
The bank has decided to keep interest rates between 4.25% – 4.50% unchanged as part of its ongoing fight against inflation.
Fed has also indicated that they will keep interest rates at the current level while it monitors inflation trends.
The Fed is expected to hold rates at the same level for several months. CME FedWatch estimates the first rate reduction will occur in July of this year. A second one is expected in December.
Fed worries that inflation may remain high. US data revealed that the personal consumption expenditures rose slightly during December. Both the headline and core numbers remained higher than the Fed’s target of 2.0%.
Donald Trump tariffs
US inflation is likely to remain high over the next few weeks after Donald Trump increased tariffs on imports from China, Mexico and Canada. US tariffs will be 25% on Canadian, Mexican and Chinese goods and 10% on all other imports.
Trump mentioned the large number of migrants who are undocumented from Canada and Mexico. Trump also mentioned the drug flows from Canada and Mexico.
Trump’s main concern is the US trade deficit with these countries.
He believes that tariffs will encourage many businesses that are active outside the US to move their factories back home.
In reality, companies simply increase prices for imports due to the complexity of conducting business in the US. The US minimum wage is $7.25 an hour. However, many people in China and Bangladesh make that much a day.
The TLT and VGLT, ETFs that track US government long-term bonds are affected by these factors. The 30-year bond yields increased to 4.80% as the threat of tariffs occurred. The 10-year, 5-year, and other yields also continued to rise.
The yields could rebound over the next couple of weeks, now that it is less likely the Federal Reserve will cut interest rates.
The TLT ETF Outlook
TLT ETF struggled over the last few years, as the weekly chart demonstrates. The TLT ETF peaked in March 2020 at $158.70 and is now down to $87.76.
It has remained under the Fibonacci Retracement of 23.6% and 50-week Exponential moving average (EMA). The ETF has fallen to its lowest level in 2016, and 2018 at $95.80.
The TLT Fund is therefore on a downward trend. Its next target level will be $78.35. This would represent its lowest point in 2023 and a 11% drop from current levels. The VGLT may also drop as low as $50.
The post What will US Tariffs do to the TLT and VGT ETFs? This post may be updated as new developments unfold
