In the context of a robust U.S. economy and the continuous cooling of interest rate cut expectations, stubbornly betting on a decline in U.S. Treasury yields by going long on U.S. Treasury bonds has become the new "widow's trade."
For a long time, the "widow's trade" referred to the market operations where traders, in their decades-long standoff with the Bank of Japan under its ultra-loose policy, spared no effort in shorting Japanese government bonds. This trading strategy was extremely risky and led to significant losses for countless traders.
The latest popular "widow's trade" is to go long on U.S. Treasury bonds through ETFs, particularly by investing in the iShares 20+ Year Treasury Bond ETF (TLT), which has a scale of $60 billion, to bet on long-term U.S. Treasury bonds.
After the Federal Reserve announced a substantial rate cut of 50 basis points last month, investors' expectations for a soft landing heated up, leading to an unprecedented massive sell-off of U.S. Treasury bonds since the beginning of the 21st century.
This has resulted in a 9% decline in TLT since mid-September, with its performance for the year 2024 turning negative, and a 6% drop year-to-date.
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Nevertheless, there are still a large number of investors persistently buying TLT. Data from Koyfin shows that over the past week, the ETF attracted an additional $1.45 billion, with a total inflow of $17.5 billion over the past 12 months.
The three times leveraged version of TLT—the Direxion 3x Long 20+ Year Treasury Bond ETF (TMF)—has plummeted nearly 20% over the past month. Last week, TMF still recorded an inflow of $133.4 million.
As the buying continues and prices fall, how many more "widows" will the long U.S. Treasury trade "create"? As long as the U.S. economy remains strong, this pain is likely to persist.
Solid economic data have led to a repricing in the bond market, with investors significantly reducing their expectations for interest rate cuts, and there is also uncertainty about whether there will be further rate cuts in November. On Tuesday of this week, swap contract pricing indicated that traders expected the Federal Reserve to cumulatively cut rates by 128 basis points by next September, down from the 195 basis points they anticipated a month ago.
On Monday of this week, the yield on the U.S. 10-year benchmark Treasury bond rose by more than 10 basis points in a single day, testing 4.20%, and on Tuesday it approached 4.22%, continuing to reach new highs since the end of July.