I asked this question to chatgtp, which said when TLT price is 100, it implied 20 year bond =2%. I feel this is not correct, since the current 20 year bond is close 4.2%. Someone who is familiar with this stuff please clarify.
When I first read this post, I thought there was an interest rate opportunity, but then I asked a different AI and it said this: To calculate the implied interest rate of long-term treasuries based on the TLT ETF, you can use the following approach: 1. Look at the 30-day SEC yield of TLT: The 30-day SEC yield is a standardized calculation that reflects the yield an investor would receive if they held the fund for 30 days, assuming all holdings remain constant. For TLT, as of the latest data available, the 30-day SEC yield was 4.33%. 2. Consider the effective duration: The effective duration for TLT is typically around 17-18 years. This measures the sensitivity of the bond prices to interest rate changes. 3. Account for expenses: TLT has an expense ratio of 0.15%, which slightly reduces the yield passed on to investors. 4. Analyze the yield curve: TLT holds Treasury bonds with 20+ years to maturity, so its yield closely tracks the long end of the Treasury yield curve. 5. Compare to benchmark: TLT tracks the ICE U.S. Treasury 20+ Years Bond Index. The yield of this index would closely approximate the implied interest rate of the long-term treasuries held by TLT. 6. Market pricing: The market price of TLT reflects investors' expectations of future interest rates. Any deviation from the underlying bond yields could indicate market expectations of interest rate changes. 7. Use the yield-to-maturity (YTM): While not directly provided for TLT, you could estimate the YTM based on the fund's holdings, which would give you a good approximation of the implied interest rate. Given the information provided, the implied interest rate for long-term treasuries based on TLT would be close to its 30-day SEC yield of 4.33%, adjusted slightly for expenses. This rate closely tracks the yield on 20+ year Treasury bonds in the market. Remember that this is a simplified approach. For a more precise calculation, you'd need to analyze the specific bonds held by TLT and their individual characteristics. Additionally, market expectations and supply/demand factors can cause the ETF's pricing to deviate slightly from the underlying bond yields.
int the above what chatgtp said in the above paragraph did not take account of current TLT price, when TLT =100 or 99, it implies different bond rate.
The actual price of TLT is essentially meaningless in relation to the actual price of bonds. Just like the price of GLD is meaningless to the actual price of gold. Just like the price of USO is meaningless to the actual price of oil.
100 means nothing. market yield are expectations while ytm is math. tlt holds about 40 bonds, maturing around 20+ years.
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about 4.07 given today it traded through 100. but bkr88 above is right, kind of meaningless as the underlying securities shorten, the etf extends out, and px falls as they pay dividends. you can do a back of the envelope calc with (years of duration * rate move) to get a % return of the underlying basket of securities and then apply that percentage move to the price of the etf. so lets say avg duration is 14 yrs for the 20yr bond basket, the 20y point falls by 1%, tlt now trading at 100, you could expect ~114 after the rate move.