5% Yields Fuel Demand For Long-Dated Treasury ETFs Despite Bond Market Pain: Is A Relief Rally On The Horizon?

The allure of 5% yields is driving investor inflows into long-dated Treasury ETFs, even as persistent bond market losses and rising macro uncertainties complicate the interest-rate outlook.

Last week, iShares 20+ Year Treasury Bond ETF saw a staggering $1.5 billion in inflows, as etfdb.com data shows.

Since the start of the year, TLT has accumulated $976 million in fresh capital, ranking it among the top 10 US-based ETFs for year-to-date inflows despite losing 2% this year following an 8% decline in 2024.

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Long Bond Yields Approach Decade-High Levels

Investors appear unfazed by recent losses in Treasury-linked assets as they position themselves for yields that haven't been seen in years. The 30-year Treasury yield is hovering near 5%, a level not seen since October 2023 and up significantly from its September levels of around 4%.

Before October 2023, yields had not reached these levels since the summer of 2007.

This yield surge has been fueled by expectations of strong economic growth and a potential resurgence in inflation as Donald Trump’s new administration prepares to take office.

Trump has proposed raising import tariffs?up to 60% on Chinese goods and 20% on other imports?policies that many economists have described as inflationary.

In addition, recent stronger-than-expected economic data, particularly on the labor market, has reinforced expectations that the Federal Reserve may keep rates elevated for an extended period.

A hawkish Fed stance, combined with resilient economic growth, has created headwinds for bondholders but an attractive environment for income-focused investors seeking a risk-free 5% yield.

ETF Investors See Value In Long-Dated Bonds

Despite negative returns, inflows into Treasury ETFs suggest that investors are looking beyond short-term price fluctuations and seeing value in locking in high yields.

Sumit Roy, senior ETF analyst for etf.com, highlighted that TLT's inflows signal confidence in long-term Treasuries, even with significant losses over the past two years.

"The inflows suggest that some investors see value in long bonds with yields hovering at levels they haven't often seen this decade," Roy said.

What's Next For Treasury Yields?

Investor attention will now shift to the December inflation report, which could set the tone for bonds in the coming weeks. A hotter-than-expected inflation print may pressure yields higher as traders price in fewer rate cuts for 2025.

Another key catalyst will come at the Fed meeting later this month, where policymakers will deliver its first monetary policy decision of 2025. A hawkish Fed tone could push yields higher as markets further price out rate cuts this year.

Alternatively, a more balanced approach could provide some relief, potentially capping Treasury yields at their current cycle highs.

Investors are also monitoring fiscal risks as former President Donald Trump prepares to take office again next Monday. His fiscal policy, which could include deficit spending and potential tariff adjustments, could weigh heavily on Treasury yields. Increased deficit spending could put upward pressure on bond yields, adding another layer of uncertainty for investors in long-term Treasuries.

However, with 30-year yields surging by 100 basis points?from 4% in September to the current 5%?investors may have already priced in a challenging inflation and deficit outlook. This could pave the way for a significant bond rally if economic data surprises to the downside or if concerns over the deficit ease.

With a duration of 15.97 years, the iShares 20+ Year Treasury Bond ETF implies that a one percentage point drop in long-dated yields could result in a nearly 16% gain for the fund.

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