This question has been asked so many times, so will send this post and please keep a bookmark of it to refer back to this
- TLT is derived from 20y bond (technically, it is a collection of long term bonds with average maturity duration of ~17 yeras, for simplicity, we assume it is 20y bond)
- To figure out TLT price movement, you want to follow the direction of 20Y bond yield. How do we figure out 20Y bond yield? We can do this by taking Fed rate and add 1% to 1.5% above that rate as the spread. Spread is so that people would normally pay higher rate for longer duration bond
- If you read Fed's annoucement today, their dot plot projects the end of 2025 (next year) Fed rate to be around 3.25%. So, if you add 1% to 1.5% to this, the 20Y bond yield would be at 4.25% to 4.75%
- 20Y bond today is already at 4.02%, so, clearly, it has run ahead of itself. After Fed annoucement, 20Y bond yield starts to move up and TLT comes down accordingly.
- BTW, if there is any negativity from today's Fed annoucement, it has to do with this projected 3.25% Fed rate projection by end of 2025. Clearly, market was hoping to see that to be around 2.75%
