The bond market frenzy is back! Investors are pouring into long-term bond ETFs, betting on a 300 basis point rate cut by the Federal Reserve

According to the Zhitong Finance and Economics APP, as the market reevaluates its expectations for a Fed rate cut this year, investors are flocking to long-term bond ETFs to seek safe havens. This week, the iShares 20+ Year Treasury Bond ETF under BlackRock saw its largest single-day inflow of funds since its inception in 2002, reaching as high as $2.7 billion. Despite the ETF's nearly 3% decline year-to-date, its cumulative inflow has reached around $4.4 billion.

Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence, stated, "Investors seem to be once again at odds with the Fed's stance." He further explained, "If their predictions come true, bond prices will experience significant volatility." Additionally, he mentioned that mid-year portfolio rebalancing could be a factor contributing to the inflow of funds.

It is understood that a rate cut typically boosts the prices of long-term bonds as the fixed interest payments on existing bonds become more attractive post-cut. Meanwhile, during an economic slowdown, many seek bonds as a safe haven. From June to date, an index tracking the total return of U.S. Treasuries has risen by approximately 1.7%, poised to deliver the best monthly performance since 2024 and nearly erasing losses for the year.

This market trend reflects investors' concerns about economic prospects and expectations for loose monetary policy. With ongoing adjustments to rate cut expectations, inflows into long-term bond ETFs may continue to increase, becoming a focal point in the market.

It is worth noting that traders in the U.S. interest rate options market are making bold predictions and bets on the Fed's future rate path. They anticipate a substantial rate cut totaling 300 basis points over the next nine months. This expectation, compared to the market's general forecast of a 75 basis point cut, appears particularly aggressive.

Over the past three trading days, the options market linked to the Secured Overnight Financing Rate (SOFR) has shown that if the Fed lowers the benchmark rate to 2.25% by the first quarter of 2025, related option contracts will yield profits. This expected outcome implies a minimum 300 basis point cut from the current level, with a low likelihood of occurrence unless the U.S. economy experiences a sudden downturn.

Despite recent Fed officials' forecasts indicating an expected 25 basis point cut by the end of this year and a total cut of 125 basis points by the end of 2025, some investors are preparing for larger rate cuts, including rapid and extreme scenarios. Hedging against these tail risks is increasingly drawing attention in the market, but due to many trades being anonymous, it is difficult to identify the market participants behind these aggressive bets In the federal funds market, traders are increasing their buying power for the August contracts, which would bring returns if the Federal Reserve announces a rate cut at its policy meeting on July 31. Meanwhile, the forward contracts linked to this meeting date only reflect an expectation of a one basis point rate cut.

Data from Morgan Stanley also shows a dovish sentiment in the spot market. The bank's latest client survey indicates that in the week ending June 24, net long positions reached the highest level in three months, reflecting a strengthening market expectation of a rate cut by the Federal Reserve