Levered Bond ETF That’s ‘Broken Many Hearts’ Sees Record Inflow

(Bloomberg) — A cohort of ETF traders are piling into a high-octane Treasury bet that interest rates have well and truly peaked. It’s one that’s burned them over the past three years.
A record $625 million flowed into the Direxion Daily 20-Year Treasury Bull 3X (ticker TMF) last week, data compiled by Bloomberg show. The fund uses derivatives to offer three times the Treasury market’s performance and is favored by short-term day traders who tend to be drawn in by volatility. Investors also added more than $1.4 billion into the iShares 20 Year Treasury Bond ETF (TLT), which followed a $1.6 billion infusion for the fund the week prior. 
The inflows come as the Federal Reserve cut rates by a quarter point last week, after an outsize 50 basis-point reduction in September. But the wager on further moves and pace of those cuts may be checked by an incoming US administration that threatens to refuel inflation with its fiscal plans.
“You’re buying TMF because you think rates are going to go down,” said Bloomberg Intelligence’s Athanasios Psarofagis. “But it seems like this trade never works. It has broken many hearts.”
Despite impressive in inflows this year, both funds have posted losses. TLT is down 4%, and TMF has dropped 25% on a total-return basis. Neither fund has seen a positive year since 2020. Yet TLT has taken in roughly $14 billion so far in 2024, which would mark its third-best annual haul since its inception. TMF has attracted more than $3.3 billion, its second-best year ever. 
Market watchers’ outlook for the US bond market was upended following Donald Trump’s victory in the US presidential election. Yields on 10-year Treasuries initially spiked on Wednesday, topping 4.47%, but the moves reversed later in the week. Still, companies like BlackRock, JPMorgan Chase and TCW are warning that the bond selloff isn’t over.
The president-elect is calling for tax cuts, which could cause a surge in the federal budget deficit, and massive tariffs, which could potentially rekindle inflation. Under such a scenario, some market participants envision the Fed potentially keeping interest rates higher than previously expected. 
Swaps traders last week were pricing the Fed will cut its benchmark rate to 4% by mid-2025, a full percentage point higher than they were predicting in September. It’s in a range of 4.5% to 4.75% now.
–With assistance from Katie Greifeld.
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