Wall Street pros lose $10B in Treasury ETF but many keep hoping

investmentnews.com:

All year, Wall Street pros have been sinking record sums of cash into the world’s largest Treasury ETF in a high-conviction bet that interest rates have peaked. All year they’ve been wrong, with an estimated $10 billion loss — yet that’s not stopping a cohort of dip buyers braving the worst market drawdown in decades.

The big reason: Even a modest rebound in long-dated government debt would spark bumper returns. 

Despite signs that inflationary pressures remain — underscored by Thursday’s data — the $39 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has attracted a record $17.6 billion so far this year. That’s the third-largest haul among more than 3,300 US-listed ETFs. 

The demand has only intensified as the fund’s plunge has deepened, a drop on full display in Thursday trading with a weak auction for 30-year Treasuries adding to the market woes. TLT is around 50% lower than its 2020 peak, even if you take into account a short-lived bounce earlier this week as the Middle East conflict sparked demand for havens. 

“TLT is the posterchild for fighting the Fed — you’re betting that they’re going to crash the economy and be forced to lower rates,” said senior ETF analyst Eric Balchunas. “People using TLT are professionals, it’s not grandma. It’s a pro trade.”

TLT closed 2.7% lower on Thursday, its worst one-day performance since May.

The bullish appetite makes sense when you think of basic investing math. With yields on 20-year Treasuries hovering near 5%, a drop of 50 basis points would deliver a total return of more than 11% over the next 12 months, according to data from F/m Investments. On the flip side, a 50 basis point rise would only result in a loss of about 1.1%. 

“The risk-reward for duration is