TLT Outlook Turns Bullish as Recession Risks Grow, Awaiting Resistance Breakout

LONG-TERM BONDS LOOK ATTRACTIVE IN Q2

The U.S. economy has been extremely resilient despite the Fed’s fast-and-furious tightening campaign aimed at choking inflation. Time and again, labor market data has surprised to the upside, defying expectations, and signaling that employers continue to add to their ranks against all odds. In this context, household spending has held up remarkably well, supporting economic activity. However, the tide may be turning following recent events.

The U.S. banking sector upheaval of early March, which caused two medium-sized banks to fail within two days of each other and shattered confidence, is likely to lead to more restrictive lending standards for households and businesses. Indicators of financial conditions do not yet reflect these adverse developments, but a credit crunch is nonetheless looming. This could be the catalyst that finally cracks the labor market and tips the economy into recession.

With investors positioning for a downturn, interest rate expectations will drift lower, prompting U.S. bond yields to extend their descent. While certain stretches of the Treasury curve may react differently, the baseline scenario calls for significant downward shift. In fact, if the Fed sticks to its pledge and doesn’t ease in 2023, long-dated yields, which primarily reflect growth and inflation prospects rather than the monetary policy outlook, could take a major hit as markets brace for a deeper slump.

If long-term bond yields take a sharp turn to the downside, the prices of these debt instruments will rally considerably considering their inverse relationship. Assuming this thesis plays out, TLT (iShares 20+ Year Treasury Bond ETF) - a highly liquid exchange traded fund that tracks the performance of long-dated Treasury securities, could build on its gains during the first three months of the year and command strength in the second quarter

To play the bullish case for TLT, two ideas come to mind: either to wait for a pull back to go in at a technical support level or to jump in on a resistance breakout. The latter option seems more attractive now, given that prices have been carving out a double-bottom formation that looks close to completion. Confirmation of this bullish pattern could come with a clean break above 109.00. This could lure new buyers and set the stage for a move towards 120.00 over the medium term.

TLT (iShares 20+ Year Treasury Bond ETF) Technical Chart

Chart Prepared by Diego Colman Using TradingView