TLT Prints Weekly Bullish Engulfing Candle – Bond Rally Next?

The iShares 20+ Year Treasury Bond ETF (Ticker: TLT) rallied almost two percent this week from open to close (13 to 17 Jan). But here’s the important bit: that rally completely eclipsed the drop the week before – when panicked investors threw in the towel. As the chart shows, TLT printed a bullish engulfing candle this week. And as the name suggests, that might be a bullish sign for the US government bond market. 

A bullish engulfing candle works like this:

First, you get a red candle – a drop in price. That’s what we saw last week: TLT opened at $87.05 and closed at $85.46 on Friday January 10th. Note that the “wick low” that week (the lowest price it reached) was $85.16.

Next, you get a green candle that “engulfs” the prior candle – after first trading below the prior candle’s low. That’s what happened this week: TLT dropped below $85.16 on Tuesday (to $84.89) and then rallied to end the week above $87.05 (last week’s open).

Why investors should pay attention to TLT

TLT is an exchange-traded fund (ETF) made up of US government bonds (“treasuries”) that have 20 years or more to mature. When investors buy these bonds, they’re effectively lending money to the US government.

So why are investors suddenly buying back into long-term bonds after dumping them just a week ago?

It could be a few things – some good: 

The market senses lower inflation. If you lend someone money for many years, you want to make sure the money they repay isn’t worth less. But if you think inflation will stay low, you’re more comfortable lending. So when investors are less concerned about future inflation, they might buy TLT. 

Interest rates could come down sooner and/or faster. Bond prices and interest rates usually move in opposite directions. When rates fall, new bonds pay less interest, making existing bonds with higher rates more valuable. That’s why investors buy long-term bonds like TLT when they expect rate cuts. Lower interest rates can inject more liquidity into the economy (borrowing gets cheaper) – which can be good for “risk-on” assets like tech stocks or bitcoin.

And some, not so good…

Recession fears creeping in. Bonds tend to rally when investors worry about slowing economic growth. If TLT runs higher from here, it could be a warning sign that the economy isn’t as strong as it seems.

Big money is hedging. Institutions could be rotating into bonds to protect against market volatility. If stocks wobble, bonds could catch a bid.

Investors are front-running the Fed. If things get bad enough, the Fed could restart buying long-term treasuries to stimulate the economy. While that might push TLT higher, it’s often a sign the economy needs life support.

TLT is way down since peaking on March 16, 2020, at $179.70, while gold, bitcoin, and stocks are way up. But, hey, let’s not get too ahead of ourselves – it’s just one bullish engulfing candle… 

Key takeaways:

• TLT’s bullish engulfing candle could signal a potential bond rally.
• Market expectations of lower inflation and/or rate cuts might be driving more bond buying.
• But TLT is still way down from its 2020 peak – this could be a false start.