Long US long-term bonds! "Internet celebrity US bond ETF" TLT sees record inflows

As investors reassess the timing of a potential interest rate cut by the Federal Reserve this year, there has been significant inflow of funds into the long-term bond ETF market. This indicates that market expectations regarding economic outlook and monetary policy direction are changing.

This week, BlackRock's iShares 20+ Year Treasury Bond ETF (ticker: TLT), with assets under management of $54 billion, set a record for the largest single-day inflow of funds since its inception in 2002. In just one day on Monday, the ETF attracted $2.7 billion in inflows. Despite a cumulative loss of nearly 3% so far this year, the net inflow of funds since the beginning of the year has reached approximately $4.4 billion.

This phenomenon is occurring as investors begin mid-year portfolio adjustments. Traders are generally betting that the Federal Reserve will cut rates by more than 100 basis points over the next 9 months, which translates to at least 4 rate cuts of 25 basis points each, as they believe economic growth is slowing down.

BI ETF analyst Athanasios Psarofagis commented:

It seems like investors are once again at odds with the Federal Reserve. They are betting on rate cuts by the Fed - if they are right, the price movements will be very dramatic.

He added that mid-year portfolio rebalancing may also be one of the reasons for the inflow of funds.

As investors prepare for a potential rate cut by the Federal Reserve, long-term bonds may see gains. Many investors are seeking safe-haven assets to hedge against the risk of an economic slowdown. An index tracking the total return of U.S. Treasuries has risen by approximately 1.7% since June, on track to deliver the best monthly performance since 2024, nearly erasing all year-to-date losses.

The Fed's dot plot indicates that Fed officials expect a 25 basis point rate cut by the end of this year, with a cumulative cut of 125 basis points by the end of 2025. However, pricing in the interest rate swap market suggests that investors anticipate a larger rate cut, expecting a cumulative cut of 165 basis points by the end of next year.

This situation highlights the divergence between market participants and the Fed on economic outlook and policy direction. Investors appear to be more concerned about the risk of economic growth slowing down, hence speculating that the Fed may need to take more aggressive rate cut measures.

However, it is worth noting that betting on aggressive rate cuts carries risks. If the economy performs better than expected, or if inflation pressures persist, the Fed may maintain a high-interest rate policy for a longer period, which could have adverse effects on long-term bond investments