When looking at the iShares 20+ Year Treasury Bond (TLT) exchange-traded fund (ETF) it is important to consider whether or not interest rates are likely to rise or remain low. The current economic situation isn’t as it seems. Many pundits and those in power will claim that the economy is in good shape. If the economy were truly in good shape, the Federal Reserve would have raised rates a long time ago. Instead rates remain low, which is  good for TLT. Janet Yellen has used the word “patience” when referring to interest rate policy. She has also stated that she will take a “wait and see approach.” These statements increase the likelihood of interest rates remaining low throughout the remainder of the year. If anything, there might be one small rate hike, but successive rate hikes seem highly unlikely. This could also lead to equities moving even higher, but it would still be an artificial run. To start, let’s look at TLT’s key metrics. (For more, see: Janet Yellen vs. Alan Greenspan: Who is the Better Fed Head?)

Key Metrics

Purpose: Tracks the Barclays U.S. 20+ Year Treasury Bond Index.

Inception Date: July 22, 2002 (up 55.64% since inception)

Average Volume: 9,370,490

Expense Ratio: 0.15% (very low)

Performance  (as of 3/18/15):

Year-to-date: 4.84%

1-Year: 25.14%

3-Year: 8.72%

Economy and the Fed

Gross domestic product (GDP) in 4Q 2014 has been revised down to 2.2% from 2.6%. This is a far cry from the 5% GDP delivered in Q3 2014. The reported reasons for the weaker performance were a slower pace of stock accumulation by businesses and a wider trade deficit. (For more, see: What is a Trade Deficit and What Effect Will it Have on the Stock Market?)

Unemployment is relatively low at 5.7%. However, in January the Consumer Price Index (CPI) fell 0.1% year over year and 0.7% versus December 2014. This is deflationary. Excluding energy, January core prices increased 1.6% year over year and 0.2% versus December 2014. That’s good news, but energy matters.

These numbers make it less likely for the Federal Reserve to raise rates. In fact, given all the cheap money and extreme leverage created across many markets, the Federal Reserve likely knows that raising rates would lead to a debt crisis. The Federal Reserve itself currently has a $4.5 trillion balance sheet. The central bank has been trying for years to stave off the next crisis and it has succeeded. But at what price? Future generations will have to pay for these actions. (For more, see: The Federal Reserve: Introduction.)

In late 2008/early 2009, the United States entered a short phase of deflation. The overall mood was savings and responsibility, and we were on the correct and responsible path. But nobody in power wants their legacy to be tied to deflation. If the Fed raises rates, bubbles burst and everything crashes. If it keeps rates low, the endgame worsens. The Federal Reserve is more likely to keep rates low, which is a positive for TLT.  On the other hand, when reality eventually strikes, TLT isn’t likely to be the best place to hide.

If you want to invest in bonds, consider high quality short-term government bonds. That said, in a deflationary environment, massive deleveraging occurs, which increases the value of the dollar. The U.S. dollar is likely to be the best long bet. But the best overall move would be cash. As prices for goods and services decline, purchasing power increases. Also, by staying in cash (at all-time market highs), if deflation occurs and the market tanks, you will have an opportunity to buy stocks at big discounts. (For more, see: A Look at National Debt and Government Bonds.)

The above analysis should be seen from a macro perspective. In the short run, anything can happen. It’s impossible to time the market, but it’s relatively easy to predict long-term results based on logic and trends.

The Bottom Line

TLT is a high-quality ETF thanks to a low expense ratio and liquidity. It should present a decent investment opportunity in the near future, but it’s probably not the best place to be over the next few years. Consider short-term high-quality short-term government bonds, the U.S. dollar and best of all cash. (For more, see: Investing in Government Bond ETFs.)

Dan Moskowitz does not have any positions in TLT. He is currently long in FAZ, TECS, DRR, and BIS.