State Street SPDR Portfolio Long Term Treasury ETF

SPTL

Market cap $11.2B

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U.S. bond yields have surged, likely due to President Trump's proposed policies, which many believe will spark inflation. We think the market has overreacted by assuming Trump's proposed policies will be implemented and/or lead to a worst-case scenario. We think the SPDR® Portfolio Long Term Treasury ETF offers a low-cost opportunity to capitalise on elevated yields.

The ECB cut rates by 25bp as widely anticipated, but a slightly hawkish tilt bear flattened the EUR curve, which in our view remains priced aggressively. In the US, as the markets head towards the Fed's first rate cut, the probability of a larger cut rose slightly on Thursday.

The first cut is the deepest — so they say. As with all complicated relationships, this mantra may certainly ring true for the Federal Reserve and the markets — at least from a psychological standpoint.

SPTL has declined by nearly 40% due to rising treasury yields and inflation. SPTL's sensitivity to rate changes caused a 41% decline, but easing inflation and weakening economy may lead to a rebound. The lower rate environment and potential economic recession make it a good time to own SPTL, with potential price returns of over 20%.

Investors took refuge in short-term Treasury bonds throughout 2023, where they reaped the rewards of higher-yielding money markets. Meanwhile, longer duration Treasuries have been mired in a bear market since 2020 but could finally start to see a reversal of fortune.

Macro conditions remain a bit of a mixed bag. In the past week alone, the latest read on inflation surprised to the downside, while unemployment figures beat estimates to the upside.

Looking ahead, the fundamental/technical case to owning Treasury bonds isn't all that favorable, either.

It generally takes a few years for changes in Federal Reserve rates to fully impact bond fund dividends. Bond funds are still benefitting from prior rate hikes. Perhaps by enough to cancel out any future rate cuts. By my estimations, and under current Fed guidance, most bond funds would only start to see declining dividends in 2025, at the earliest.