How rising interest rates effect bond ETF's

Many in the U.S. and around the world think that the Federal Reserve will begin the process of raising interest rates soon. For years now the Federal Reserve Bank has taken actions to keep interest rates low in order to spur economic growth. The belief was that with low interest rates the consumer will be more likely to spend. Most would argue that this worked out for the upper class and many businesses, but not so much for the middle and lower class on America. 

With the belief that rates will soon rise there has been a mass exodus from bonds and bond related ETF's. Remember that rates are inversely correlated to price. For example, when interest rates rise (or are anticipated to rise) the price of bonds goes lower. If you were to look at an ETF such as the iShares 20+ year Treasury Bond (NYSE: TLT), you could see investors selling bonds which has pushed prices lower (rates higher).

The TLT is by far one of the most popular ways for stock traders to participate in interest rates. The ETF participates in bonds that have 20 or more years until maturity. The ability for the average trader to come take a position in bonds without having to go purchase bonds has dramatically increased the TLT's popularity.

Looking at the performance of the TLT though you can see quickly that many are anticipating higher interest rates. Since early November (after the election) the TLT has lost over 8%. This was largely due to the fact that the Federal Reserve announced they wouldn't adjust rates until after the election. Well, after the election the TLT has been pretty much straight down. The decline really started back in June though. Since then the TLT has lost over 16%, slowly declining month after month. It wasn't until just after the election that the decline picked up steam.

So is this it for the TLT? Will it be headed lower from now on? Well, that depends on the Federal Reserve's predictions about the economy, as well as the overall performance of the economy. As is stands now, the Fed has made it pretty clear that they feel they can begin to raise rates.