Unafraid of Trump 2.0 inflation risks, traders are buying up US bonds in large quantities.

A group of ETF traders are heavily betting on US Treasuries, believing that interest rates have indeed peaked. However, over the past three years, they have suffered heavy losses. Data compiled by Bloomberg shows that last week, a record $625 million flowed into the 3x long position in 20-year plus US Treasury ETF-Direxion (TMF.US). This fund offers returns three times the performance of the US Treasury market using derivatives, favored by short-term traders. Investors also poured over $1.4 billion into the 20+ year US Treasury ETF iShares (TLT.US), after the fund attracted $1.6 billion the previous week. As funds flowed in, the Federal Reserve lowered interest rates by 25 basis points last week, following a significant 50 basis point cut in September. However, the new US administration may stimulate inflation through fiscal measures, which could hinder further bets on interest rate cuts. Athanasios Psarofagis of Bloomberg Intelligence said, "Investors are buying TMF because they believe that interest rates will drop. But this trade seems to have never been successful. It has broken many people's hearts." Despite the impressive inflows this year, both funds have incurred losses. TLT has declined by 4% in total return, while TMF has dropped by 25%. Both funds have not achieved positive annualized returns since 2020. However, TLT has attracted approximately $14 billion in 2024 so far, making it the third largest annual inflow since the fund was established. TMF has attracted over $3.3 billion in funds, marking the second largest annual inflow in history. Market sentiment towards the US bond market has been overturned since Trump won the US presidential election. The yield on the 10-year US Treasury initially surged past 4.47% last Wednesday, but reversed later in the week. However, companies like BlackRock, Inc., J.P. Morgan, and TCW have warned that the bond sell-off is not over. Trump's calls for tax cuts might lead to a sharp increase in the federal budget deficit, and his calls for large-scale tariffs could reignite inflation. In this scenario, some market participants expect the Federal Reserve to keep interest rates at a level higher than previously anticipated. Derivatives traders last week forecast that by mid-2025, the Federal Reserve would lower the benchmark interest rate to 4%, a full percentage point higher than their prediction in September. Interest rates are currently between 4.5% and 4.75%.