Shocking $10 Billion Loss: The Truth Behind Big Bets on TLT Bond ETF

Professional traders have lost $10 Billion betting that the TLT Bond ETF will rise as interest are lowered during the upcoming recession. Investors have been piling into the iShares 20+ Year Treasury Bond ETF (TLT) with the expectation that a small drop in interest rates will give them a big rise in the price of TLT.
A Bloomberg article explains that traders see this as a trade with very little risk compared to the upside if they are right about falling interest rates. But they have invested over $17 Billion into TLT this year and are now sitting on $10 Billion in losses while they wait for their expectations to play out.
What if they are wrong and long term bond interest rates continue much higher?
I show how much they stand to lose or gain as interest rates on long term bonds go higher or lower. If you are thinking of moving from short term Treasury Bills into longer term bonds like the 10 Year Note or 30 Year Bond, watch this video first so you can understand the risks of increasing duration on your bond investments.

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Guys as long-term interest rates are now rising to levels not seen since 2007 a lot of investors have been betting on the 20-year government treasury ETF called TLT and they are betting that interest rates have peaked and they expect rates will fall when we hit a recession in 2024 the problem is that

They have been making this bet for many months now and have been wrong to the the tune of about $10 billion in losses so far an article on Bloomberg talks about this and shows how much they stand to gain or lose for drops or increases in interest rates from here so are these

Investors correct and just early or are they wrong and stand to take much more losses as longterm interest rates go higher if you are considering moving your investments from shorter term term treasury bills to longer term bonds what are the risks you take for taking on that longer duration which makes longer

Term bonds much more sensitive to interest rates let’s take a look so Bloomberg says dreams of big Bond gains backfire with 10 billion ETF loss so all of this money is Flowing to TLT despite an epic draw down because of the rare chance for doubl digigit returns at the

Long end so they say Wall Street Pros have been sinking record sums of cash into the TLT in a high conviction bet that interest rates have peaked and all year long they’ve been wrong with an estimated $1 billion loss but that’s still not stopping a cohort of dip

Buyers braving the worst Market draw down in decades so why do they continue to buy this thing as it goes down because even a modest Rebound in long-dated government debt would spark bumper returns so they’re expecting interest rates to go down with a recession and that would make longer

Term bonds increase in value by a lot so the I shares 20-year treasury bond TLT has $39 billion assets under management and has attracted a record 17.6 billion so far this year but the price of TLT is about 50% lower than its 2020 Peak so they say that the TLT is the poster

Child for fighting the FED you’re betting that they’re going to crash the economy and be forced to lower rates and so that’s why so many people are getting into TLT but here they say people using TLT are professionals it’s not Grandma it’s prot trade well it’s not that Pro

Of a trade to keep losing money and keep putting money into something if it’s still going down I don’t I know if this is an article to try to get retail buyers to bail out the so-called professionals by buying TLT to help get the price back up so here’s a price of

The TLT and you see just January of 2023 it was close to 110 now it’s in the low 80s but this is why people are buying it because with the 20-year treasuries at around 5% a drop of just 50 basis points points or in other words half a

Percentage point would deliver a total return of more than 11% over the next 12 months and that 11% means that you get 5% coupon from the 20-year treasury plus the price of the TLT will increase by about 6% if the 20-year treasury is dropped by about half a percentage point

And they say on the flip side a half a point rise would only result in a loss of of about 1.1% and that’s because TLT will go down 6% but you’ll have that 5% coupon so your loss will only be like 1% so they see it as kind of a lopsided trade heads

I make 11% Tails I only lose 1.1% all right they say the risk reward for duration is extraordinarily favorable right now and it’s just the bond math right but Bloomberg says that they estimate that more than 10 billion of cash has been burned by TLT this year judging by the fund’s current assets

Relative to its lifetime flows right if you compare it to a much shorter duration like on the 2-year yield that are about 5.07% a half a point jump would produce about 4.6% and a half a point drop would produce a gain of 5.55% so not much of a

Big difference compared to the 20year and you can see the 12-month total returns based on different yields here in this table right so for a 2-year treasury a 1 and a half percentage Point rise you’ll make 3.7% total in a year and if it falls the same amount you’ll make

6.5% but for a 10-year treasury you will lose 5.8% if it rises 1 and A2 percentage points and you will make 16.4% if if it falls 1 and A2 and for the 30 year it’s even more pronounced you have a 15.7% loss versus a 33.5% gain and at real extremes if

Interest rates Rose three percentage points in the next 12 months your 30-year treasury would lose 30.4% of its value versus if it fell three percentage points which is what some people may think that the FED is going to lower rates by a lot if we hit a recession and

We’re going back to 2% or something like that you would have a 74.7% gain from that so let’s look at a real world example of how the price of bonds differ when interest rates change so let’s say this is a 10-year bond and it is paying 5% and you just bought it

Today so it has 10 years left and you paid a $100 face value and this is what you will receive in 10 years plus the 5% interest a year but the same day you bought it the interest rates for the 10e changeed to 6% now that doesn’t happen

Overnight but just for the example what does the value of this Bond become it becomes 9256 so you lose 75% on the value of the bond but now same situation but now it falls one percentage point the same day you buy it what is this value of this Bond now well

Now it’s worth 108 so you made 8% on the value of the bond and if we do a 30-year it’s even more sensitive so 30e at 5% the rates changed to 6% what is the value of this now now it’s only 86 so you lost 14% just from a rise in interest rates

By 1 percentage point and if interest rates go to 7% what happens your bond is now worth $75 or you lost about 25% of the value of your bond so this is the risk of trying to buy a really long Bond right now thinking that rates have

Peaked at 5% uh 5% is not very high this has been considered normal for many many years but let’s say you buy it at 5% and it goes up to 7% in a year or two you’re looking at a pretty big loss on the value of your bonds now on the flip side

If you think we are going into a recession and they’re going to lower interest rates and the 30 year is going to go from 5% down to 3% well the value of your bond goes up by about 39% and so this is what these people are buying TLT

For because they want that big jump that they’re going to get if interest rates fall even just half a point one point something like that and so they see this as a good bet they say the overall rate is big enough that you make such a meaningful return on the cash flow that

You’re now actually paid to take on the long-term risk now this guy FM’s president and CIO doesn’t say how long they’ve been buying these longer term bonds and if they’re sitting on losses because they got in too early or not I don’t know but it sounds like he is

Because it says if you want to earn this you’re going to have to accept some short-term volatility that’s Amplified by the duration Factor Factor but if you bought in today you’d get this experience and it doesn’t exist forever and even in the options Market tlt’s open interest for coal contracts is

Close to a 20-year High relative to bearish puts so it seems they’re really talking their book maybe they’re have these big losses in they’re trying to get people to buy this thing the Mom and Pops because here’s another reason for enduring duration demand should the US economy fall into a recession

An ensuing Bond rally would cushion portfolios from stock losses now just because a bunch of investors are betting on TLT to go higher it does not mean that they are right and with governments cutting back on buying our debt and our spending increases going out of control

It is not unreasonable to think that long-term rates can go higher historically a 5% 30-year bond is actually cheap My First Mortgage in 19 96 was over 9% I believe and of course the realtor told me to lock in my mortgage right now because rates are

Going higher of course now I would guess that 5% on the 30-year bond is not where rates will Peak but let me know what you think in the comments below thanks for watching Guys