TLT ETF: Stanley Druckenmiller warns of a fiscal horror show

The iShares 20+ Year Treasury Bond ETF (TLT) has been in a strong freefall this year as the turmoil in the bond market continued. The stock plunged to a low of $83.58, the lowest level since 2014. It has collapsed by more than 50% from the highest point on record.

Stanley Druckenmiller warning

The biggest catalyst for the TLT ETF will be the upcoming Federal Reserve interest rate decision. In it, most analysts believe that the bank will decide to leave interest rates unchanged between 5.25% and 5.50%, the highest level in over two decades.

The key details to watch will be the bank’s plan going forward. Some analysts believe that the bank will point to a continued rate pause while others see it pointing to another 0.25% increase in December.

There will be another catalyst for long-term government bonds. The Treasury Department will publish the quarterly refunding statement, which will show the amount of money it plans to borrow. Analysts expect it to borrow over $1 trillion in the coming months.

It is against this backdrop that Stanley Druckenmiller blasted Janet Yellen and American politicians. In a recent statement, she blasted Yellen for not refinancing the country’s debt when interest rates were at zero.

By his calculation, by not refinancing the debt, the American economy will suffer over $1 trillion in losses if interest rates remain at the current levels.

Stan also warned about the ongoing government spending that has pushed the country’s debt too high. Total public debt has surged to over $33.65 trillion, up from $10 trillion a decade ago.

Sadly, the situation is expected to worsen as the current wave of government spending continues. Joe Biden has unveiled several stimulus programs and is now requesting over $100 billion in aid to Ukraine, Israel, and Taiwan.

Entitlement spending issue

Druckenmiller, who is a protege of George Soros, also warned about increased entitlement spending. He believes that entitlement programs like Medicaid, Medicare, and Social Security must be reformed. Besides, they account for two-thirds of federal spending and Joe Biden and Donald Trump have said that they will not touch them.

Failure to reform this spending now will lead to more trouble in the future. For one, interest rate spending will continue surging as the debt burden mounts. The government spent over $820 billion servicing its debt in the last financial year. This could rise to over $1 trillion as the debt increases and interest rates remain at multi-decade highs.

The difficult situation is that interest rates on government bonds will likely not drop any time soon. For one, Fitch downgraded the US a few months ago and there is a likelihood that Moody’s will do the same.

At the same time, the biggest buyers of America’s debt are cutting back. China has dumped billions of dollars in US treasuries. The same is true with Japan and Saudi Arabia. The Federal Reserve has also been implementing quantitative tightening (QT).

All these factors mean that long-term Treasuries will lose their appeal among investors, which will drag the TLT ETF lower.

Stanley Druckenmiller’s comments mirror what he said recently in a speech titled ‘The Coming Fiscal Horror Show.’

The post TLT ETF: Stanley Druckenmiller warns of a fiscal horror show appeared first on Invezz