When the Follower Becomes the Leader
In most parts of life, the rule is simple — follow the leader.
But in the bond market, the game’s a little different. Here, it’s more like carry the follower.
That’s exactly what we’re seeing play out right now between short term and long term Treasury bonds. The 1–3 Year Treasury Bond ETF ($SHY) has started to climb, showing signs of strength and stability. But the 20+ Year Treasury Bond ETF ($TLT) still lags behind, weighed down by something heavier — inflation expectations.
In other words, SHY is trying to carry TLT up the hill, but TLT’s got a backpack full of bricks labeled inflation.
Short Term Bonds Leading, Long Term Bonds Lagging
This chart makes the point crystal clear.
The black line ($SHY) has already started moving higher — short term rates are stabilizing as investors sense the Federal Reserve may continue cutting rates. But look at the green line ($TLT). It’s still stuck in the mud, unable to rally with the same conviction.
That divergence tells us something important about the macro environment:
When short term bonds lead and long term bonds lag, it’s usually a “reflation” regime.
Growth and inflation are both moving higher, but not at runaway levels.Investors expect the economy to hold up, which benefits equities and select commodities — sectors like speculative tech, industrial metals, and small caps tend to thrive in this phase.
Reflation is the sweet spot of the cycle. Inflation is rising, but moderately. Growth is accelerating, and risk assets are rewarded.
The challenge is balance. If inflation starts to heat up too quickly, the “weight” on TLT becomes too heavy. Long duration bonds will sink again, signaling that markets are bracing for more inflation or higher yields ahead.
Energy vs. Bonds — The Tug of War
To see this dynamic from another angle, look at the Energy sector ($XLE) versus long term Treasuries ($TLT). These two are often on opposite sides of the rope in the inflation tug of war.