Published on 
November 13, 2023

$10 Billion ETF Loss: A Disappointing Nightmare for Bond Investors

Radek Jezbera

Investors poured a record $10 billion into the Treasury Bond ETF (TLT) this year, making a big bet that long-term interest rates would decline. The premise was that bond prices move opposite to yields, so if rates fell, bond prices would rise and TLT investors would profit.

With the Federal Reserve rapidly hiking short-term rates, TLT offered a chance to earn significant double-digit returns if the yield curve flattened or inverted, driving down long-term yields. Investors hoped to capitalize on a rally at the long end of the curve.

However, the trade backfired as the exact opposite occurred - long-term rates climbed higher instead of falling. The yield on the benchmark 10-year Treasury note rose above 4.7%, leading to sharp bond price declines.

This yield spike crushed the upside scenario TLT investors were betting on. With long-term bond prices dropping, TLT suffered estimated losses of $10 billion this year even as investors continued pouring money in, hoping rates would reverse.

The risk of higher inflation and more aggressive Fed policy materialized, defying expectations for peaks in both. TLT shows the hazards of making big directional bets on interest rate moves in uncertain markets.

The tale of TLT's downfall vividly illustrates, the market can be an unpredictable ally and a formidable adversary. Will investors heed the lesson or persist in pursuing fast, substantial gains through daring, directional bets? And what about those entangled in TLT's downward spiral - will they discover a way out or remain hindered by the market's unforeseen fluctuations? Only time will reveal.


About the author

Radek Jezbera

Radek is the founder & co-CEO of KILDE, a regulated platform for alternative investments. KILDE is powering digital lending firms with debt capital to reach underbanked customers in South East Asia.


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