Why Does TLT Keep Dropping?

If you’ve checked your portfolio recently, you’ve likely seen the worrying trend in the iShares 20+ Year Treasury Bond ETF (TLT). Watching an investment often labeled “safe” consistently fall into the red is confusing, especially for new investors. You’re not alone in asking one simple question: why does TLT keep dropping?

The answer involves a powerful financial rule that acts like a seesaw. On one end sits the price of existing bonds, like those inside TLT, and on the other sits the level of current interest rates. As one side goes up, the other is forced to come down.

This guide explains how that financial seesaw works and why TLT’s specific design makes it extra sensitive to these changes. You’ll gain a clear mental model that turns confusion about bond news into the confidence of understanding exactly what’s happening.

First, What Exactly Am I Owning in TLT?

TLT is not a stock in a single company like Apple or Ford. Instead, think of it as a pre-packaged shopping basket you can buy with one click. This type of investment is called an Exchange-Traded Fund, or ETF. The important question is, what specific items are inside TLT’s basket?

The items inside are a particular type of investment called U.S. Treasury bonds. A bond is really just a formal IOU. When you own a Treasury bond, you have lent money to the U.S. government. In return for your loan, the government promises to pay you back your original money after a set number of years, making small, fixed interest payments to you along the way.

Crucially, TLT doesn’t hold just any government IOUs. It exclusively holds long-term bonds—ones that won’t be fully paid back for over 20 years. This long timeline is the single most important detail for understanding its recent performance. It makes these bonds extra sensitive to changes in the wider economy, operating like one side of a giant financial seesaw.

The Financial Seesaw: Why Bond Prices and Interest Rates Move in Opposite Directions

That financial seesaw works because of a simple rule. Think of a bank’s Certificate of Deposit (CD), which is similar to a bond: you lock up your money for a fixed interest payment.

Suppose you bought a CD that pays 2% interest. A month later, because the economy has changed, the bank starts offering brand new CDs that pay 5%. If you needed to sell your 2% CD to a friend, would they pay you the full price? Of course not—they could just go to the bank and get the new 5% one. To make a sale, you would have to offer your CD at a discount.

Bonds in the open market behave in exactly the same way. When new government bonds are issued with higher interest payments, they make the older, lower-paying bonds held in TLT less appealing. To attract a buyer, the price of those older bonds must drop. This drop in price effectively boosts the bond’s overall attractiveness for a new owner, a concept known as its yield.

This inverse relationship is the core principle. When you hear news that “interest rates are going up,” you can translate that in your head to “the market price of existing bonds is going down.” The drop you see in your TLT shares is this financial seesaw in action, as the value of its older bonds adjusts to a world of higher rates.

The “Why Now?”: Pinpointing the Cause of Rising Interest Rates

The main actor pushing interest rates higher is the U.S. Federal Reserve, often just called “the Fed.” Think of the Fed as the nation’s economic manager, whose job is to steer the economy by keeping prices stable and employment strong. Its primary tool for doing this is adjusting the country’s benchmark interest rate.

You’ve likely felt the reason for the Fed’s recent actions every time you buy groceries or fill up your car. When the cost of everyday goods and services rises persistently, it’s called inflation. To fight inflation, the Fed raises interest rates. This makes borrowing money more expensive, which gently taps the brakes on the economy by encouraging people and businesses to spend less and save more.

This creates a clear chain of events connecting the news headlines directly to your portfolio. High inflation pressures the Federal Reserve to act. The Fed acts by raising interest rates. And as we saw with our financial seesaw, those higher new rates cause the market price of older bonds—like the ones held in TLT—to drop.

The Long Lever Effect: Why TLT Is Extra Sensitive to Rate Changes

If rising rates push all bond prices down, why does TLT seem to be taking such a nosedive? The answer lies not just in the bond itself, but in how long we have to wait to get our money back.

Imagine trying to lift a heavy weight with a lever. A short, stubby crowbar requires a lot of effort to move the weight even a little. A very long lever, however, can send that same weight flying with just a small push. A bond’s lifetime—its duration—acts just like this. The longer the bond’s life, the longer and more sensitive the lever.

TLT exclusively holds U.S. Treasury bonds with very long lifetimes of 20 years or more. Essentially, the fund is a basket full of those extra-long, sensitive levers. This magnification effect is one of the primary risks of holding long-duration bonds; their prices are simply more reactive to interest rate changes.

Consequently, even a small nudge from the Fed on interest rates creates a huge swing in TLT’s price. This “long lever effect” is key to understanding TLT duration and interest rate sensitivity and explains why its value can fall so sharply.

Putting It All Together: A Quick Comparison of TLT vs. BND

To see this “long lever effect” in action, consider another popular bond fund: the Vanguard Total Bond Market ETF (BND). During the same period that TLT saw sharp declines, investors in BND likely noticed a much smaller drop. Both are bond funds, so why the different results? It all comes down to what’s inside the basket.

While TLT specializes in only long-term bonds, BND takes a different approach. Instead of holding only long levers, think of BND as a “bond salad” holding a mix of everything: short-term, intermediate-term, and long-term bonds. This creates an “average” duration that is much shorter and less sensitive than TLT’s very long lever. The result is that the same push from rising interest rates creates a much smaller price movement for BND, explaining why the performance of TLT vs. BND can be so different.

This comparison highlights a crucial lesson for any investor: not all bond funds are the same. The length of the bonds inside a fund is the single biggest factor determining how volatile its price will be.

What Can Investors Do to Hedge Against Rising Rates?

What can be done about this risk? In finance, the act of protecting an investment against a potential loss is called hedging. Think of it like buying insurance for your portfolio; it’s a strategy designed to reduce risk. When learning how to hedge against rising interest rates, investors are really asking how they can soften the blow from that financial seesaw. While deciding if you should sell your TLT shares is a personal choice best discussed with an advisor, understanding the available tools is key.

Professionals often turn to a few core concepts to navigate these periods. The goal isn’t necessarily to find the single best alternative to long-term bonds, but to build a more resilient portfolio. Common approaches include:

• Holding Shorter-Duration Bonds: If long-term bonds are long levers, short-term bonds are the opposite. Their prices are much less sensitive to interest rate changes.
• Considering Different Asset Classes: This is diversification. The idea is to own a mix of investments (like stocks, real estate, or commodities) that don’t always move in the same direction as long-term bonds.

These strategies aren’t about predicting the future, but about ensuring that a downturn in one area of your portfolio doesn’t capsize the entire ship. By understanding the roles different investments play, you shift from worrying about day-to-day price drops to thinking about long-term financial balance.

Your New Mental Toolkit for Understanding the Bond Market

Headlines about “The Fed” and interest rates may have once felt like a source of anxiety. Now, you hold the key to understanding the bond market and its movements. You can transform that complex financial noise into a simple, predictable story, replacing uncertainty with a clear framework for what’s happening and why.

Here’s the entire cause-and-effect chain in a single thought: The Federal Reserve is raising interest rates. This makes newly issued bonds more attractive than older ones. To compete, the price of those old bonds must drop. Because TLT holds very long-term bonds, its price is extra sensitive to these changes—like a long lever that creates a big movement from a small push.

Your next step isn’t about a specific trade, but a new habit. The next time you see headlines about the Fed, try to connect them to this new mental model. You will no longer just hear noise; you’ll understand the financial seesaw at work, giving you a clearer long-term treasury bond outlook and turning confusion into confidence.