This Bond ETF's Wild Rally Echoes The Pandemic Market Chaos

One long-duration Treasury bond ETF has surged nearly 9% in just four trading sessions, a performance that mirrors rallies last seen during the 2020 pandemic panic and the deflationary scare of August 2024.The PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ jumped 8.8% between Sept. 3 and Sept. 8, fueled by a dramatic drop in Treasury yields after a shockingly weak U.S. jobs report reignited bets on imminent Federal Reserve rate cuts. On Sept. 6 alone – the day of the jobs report – the fund soared 2.7%, one of its strongest daily gains of 2025. By contrast, the SPDR S&P 500 ETF Trust SPY added only 1.3% over the same period, underscoring a rare and decisive outperformance by bonds over equities — a phenomenon not commonly observed since the pandemic.Why Is ZROZ Rallying So Hard?The jobs report for August drastically reshaped market expectations. Only 22,000 jobs were added, while prior months were revised downward, including a contraction of 13,000 in June — the first monthly job loss in nearly five years. The unemployment rate rose to 4.3%, its highest since October 2021.The weak data sent yields tumbling. The 30-year Treasury yield fell from 5.00% to 4.70% in a matter of sessions, a 30-basis-point move that is enormous for long-dated bonds.ZROZ is uniquely sensitive to such moves due to its composition: it holds zero-coupon, ultra-long-term Treasury bonds. These securities don’t pay interest periodically; instead, they pay their full value at maturity. That structure magnifies their price reaction to interest rate changes — a concept known as duration. The longer the duration, the bigger the price move when yields shift.So when long-term yields fall rapidly, ZROZ becomes one of the most powerful tools to capture the upside in Treasury prices.Are Fed Rate Cuts Locked In?Markets are now fully pricing in a rate cut at the Fed's Sept. 17 meeting, with elevated odds of additional easing in October and December. According to 22V Research's Dennis DeBusschere, “A series of rate cuts to end 2025 and persistently easy financial conditions should be expected.”"There is now clearer evidence of weaker labor demand, not just supply. Hence, we expect the Fed to cut by 25bp in September and December," Bank of America economist Aditya Bhave added.Lower rates reduce the discount rate applied to future bond cash flows, boosting bond prices. For zero-coupon bonds, this effect is even more pronounced.Is This Signaling A Recession?Despite the dramatic market reaction, a recession is not yet the base case. According to data from prediction market Kalshi, the odds of a U.S. recession in 2025 remain low — just 4% by the end of the year.There is also a 14% chance that a recession could only start in the last quarter.Wall Street veteran analyst Ed Yardeni said the Fed's expected rate cuts could avert a downturn: "The 2026 recession odds would remain low with a rate cut on September 17 and more rate cuts after that." However, Yardeni warned that rate cuts could be stimulative in an economy that doesn't actually need more monetary support.What's Next for Bond Investors?If the U.S. economy avoids a recession, then the case for long-duration Treasurys weakens. Without a prolonged slowdown, bond yields could stabilize or even rise again, capping gains for funds like ZROZ.But if growth remains subdued and the Fed commits to easing into 2026, the bond rally could have more room to run.Photo: Lightspring/Shutterstock