Fearless of Trump 2.0 Inflation Risks, Traders Are Aggressively Bottom-Fishing U.S. Treasuries

According to the Zhitong Finance APP, a group of ETF traders is heavily betting on U.S. Treasury bonds, believing that interest rates have indeed peaked. However, they have suffered significant losses over the past three years. Data compiled by Bloomberg shows that last week, a record $625 million flowed into the 3x long 20+ Year Treasury Bond ETF - Direxion (TMF.US). This fund offers returns that are three times the performance of the U.S. Treasury bond market and is favored by short-term traders. Investors also injected over $1.4 billion into the 20+ Year U.S. Treasury Bond ETF - iShares (TLT.US), after the fund had attracted $1.6 billion the previous week. As funds flowed in, the Federal Reserve cut rates by 25 basis points last week, following a significant 50 basis point cut in September. However, the new U.S. government may stimulate inflation through fiscal plans, which could suppress bets on further rate cuts. Athanasios Psarofagis from Bloomberg Intelligence stated, "Investors buy TMF because they believe rates will fall. But this trade seems to have never been successful. It has broken many hearts." Large inflows into TMF Despite impressive inflows this year, both funds have posted losses. In terms of total return, TLT is down 4%, and TMF is down 25%. Neither fund has achieved annualized positive returns since 2020. However, so far, TLT has attracted about $14 billion in 2024, which would be the third-largest annual inflow since the fund's inception. TMF has attracted over $3.3 billion, marking the second-largest annual inflow in history. After Donald Trump won the U.S. presidential election, market observers' outlook on the U.S. bond market was turned upside down. The yield on the 10-year U.S. Treasury bond initially soared last Wednesday, breaking 4.47%, but reversed later in the week. However, companies like BlackRock, JP Morgan, and TCW have warned that the bond sell-off is not over. Trump's call for tax cuts could lead to a surge in the federal budget deficit, and his call for large tariffs could reignite inflation. In this scenario, some market participants expect the Federal Reserve to maintain interest rates at levels higher than previously anticipated. Swap traders last week expected that by mid-2025, the Federal Reserve would lower the benchmark rate to 4%, a full percentage point higher than their September forecast. Current rates are between 4.5% and 4.75%