Going Longer: Deeper Rotation Into Duration?

Investors took refuge in short-term Treasury bonds throughout 2023, where they reaped the rewards of higher-yielding money markets. Meanwhile, longer duration Treasuries have been mired in a bear market since 2020 but could finally start to see a reversal of fortune.

In just one month, the odds of a September rate cut have risen from nearly 50% to 100%, as of Wednesday. The market had pared back its expectation of five rate cuts to a single cut at one point. It has bumped back up to 2.5 cuts this year. A combination of cooling inflation, softer payrolls and weaker growth data have contributed to the uptrend in the federal funds futures market. Federal Reserve Chair Jay Powell reiterated last month that if the labor market were to slow “unexpectedly,” the Fed would be “prepared to respond” by cutting rates. June core consumer prices rose at their slowest monthly pace since January 2021 – during a winter flare-up of Covid-19 – setting the stage for rate cuts, as investors grapple with whether bad news for the economy is good news for rate policy.

U.S. 10-Year Treasury Yield

U.S. 10-Year Treasury Yield

The iShares 20+ Year Treasury Bond ETF (TLT) – the biggest long-duration bond ETF out there – just enjoyed a record day and week of inflows last month and is now coming off its fifth week of inflows north of $1 billion in 2024. The $55 billion fund, often treated as a proxy for the long-term Treasury bond market, has also raked in more than $7 billion in net inflows so far this year – a sign that perhaps investors are finally willing to either take on or extend duration.

TLT did suffer sizable outflows in January and March, as rate cut odds wavered amid signs of stickier inflation. But overall, it’s seen strong net positive inflows for the year. Bond returns have been sluggish up until interest rates peaked at the end of April. However, Treasuries have widely recouped most of their losses since January.