"Widow trading" continues! TMF, which triples down on U.S. Treasuries, saw record inflows last week

The ETF version of "widow trading" continues. Despite the decline in U.S. Treasury bonds, a large amount of capital continues to flow into U.S. Treasury bond ETFs, betting that interest rates have peaked.

According to Bloomberg data, last week, Direxion's 3X Long 20+ Year Treasury Bond ETF (TMF) saw an inflow of $625 million, setting a record high. Additionally, BlackRock's iShares 20+ Year Treasury Bond ETF (TLT) attracted $1.4 billion in inflows, following an inflow of $1.6 billion the previous week.

Last week, the U.S. Treasury market experienced a wild week, first facing a massive sell-off after Trump's victory, with yields soaring across the board, and the 10-year Treasury yield briefly rising above 4.47%. However, the trend reversed as traders closed out their "Trump trades," the 10-year Treasury auction was strong, and the Federal Reserve's interest rate cuts took effect, leading to a weekly drop of over 8 basis points in the 10-year Treasury yield.

Last week, both TLT and TMF rose, with TLT increasing by 1.82%. However, looking at the longer time frame, TLT has fallen over 6% this year, while TMF has plummeted nearly 25%.

Yet, capital continues to pour in. TLT has attracted about $14 billion year-to-date, making it the third-largest annual inflow since its inception, while TMF has drawn over $3.3 billion, marking its second-largest annual inflow ever.

In fact, neither of these funds has posted positive returns since 2020. Bloomberg intelligence analyst Athanasios Psarofagis stated, “You buy TMF because you believe interest rates will fall, but this trade seems to have never worked. It has hurt a lot of people.”

With the U.S. economy remaining robust, the Federal Reserve has initiated a significant easing cycle with a 50 basis point rate cut, combined with the potential for aggressive fiscal stimulus policies under Trump, raising concerns that U.S. inflation may reignite. This has led to a fierce sell-off in U.S. Treasuries since September, with the 10-year Treasury yield rising from around 3.5% to approximately 4.3% currently.

The market currently expects the Federal Reserve to maintain interest rates at a higher level than previously anticipated. Swap contracts indicate that traders expect the Fed to lower the benchmark rate to 4% by mid-2025, a full percentage point higher than their September forecast This means that the pain of "widow trades" may continue.

The strategist team at LPL Financial wrote in a report on Monday: "Better economic data, a possibly overly dovish Federal Reserve, and more policy details from the Trump administration could push up U.S. Treasury yields... Only a negative economic surprise would lead to a significant decline in yields from current levels."