TLT ETF stock is rising: long-term risks outweigh potential rewards

December 12, 2023 07:13 AM PST | By Invezz

TLT ETF stock is rising: long-term risks outweigh potential rewards — Image source: Invezz

Long-term risks remain

TLT is a major fixed income ETF with over $41 billion in assets. The fund tracks an index made up of long-term American Treasury bonds. It tracks about 41 issues in the ICE US Treasury 20+ Year Bond Index.

The TLT ETF crashed hard this year as investors predicted that the Federal Reserve would continue hiking interest rates. In most cases, long-term bond yields underperform short-term ones in a high-interest rate environment.

Despite the recent jump, long-term US Treasuries are still extremely risky because of the state of the American economy. The most recent data shows that US public debt has jumped to over $33.8 trillion. If the trend continues, the debt will rise to over $34 trillion in the next few months.

The challenge is that government spending is still rising in the US. Interest paid on the country’s debt has already hit $1 trillion this year. This interest will likely continue rising as the underlying debt jumps.

Democrats and Republicans are still focused on more government spending. National debt jumped by over $7.8 trillion during Trump’s time as the president. Biden has already added over $5.7 trillion.

Further, the US has already lost two of three AAA credit score. S&P Global slashed it in 2011 and Fitch downgraded the long-term ratings. This leaves only Moody’s as the only agency with a AAA rating. And in November, the company warned that it could downgrade these bonds.

Losing the Triple A rating is a major thing considering that low-rated countries pay higher interest because of the risks involved.

Watch here: https://www.youtube.com/embed/dOeF_ydFehI?feature=oembed

Financial challenges remain ahead

There are no immediate risks for the US to default on its obligations but the situation will get worse in the coming years. In this period, the US will continue spending heavily in defence, interest, health, and social security.

As a result, total deficits will likely remain above $1 trillion in the next decade. Worse, the social security funds will run out in 2033, putting the government in more trouble.

When this happens, long-term bonds will still do well since the government’s first core mandate is to pay its bond holders. Most of these bondholders is the American public now that countries like China, Saudi Arabia, and Japan are slashing their holdings of US debt.

Therefore, I believe that TLT and other long-term ETFs are quite risky for long-term investors. As such, if you are interested in fixed income ETFs, I would suggest focusing on short-term ones.

Some of the top ETFs to consider are the iShares Short Treasury Bond ETF (SHV) and the JPMorgan Income ETF (JPIE).

The post TLT ETF stock is rising: long-term risks outweigh potential rewards appeared first on Invezz

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