Investors Piled Into Long-Term Treasury ETFs Ahead Of Moody's Downgrade: Will Confidence Hold?

Investors poured billions into long-dated U.S. Treasury ETFs in the days leading up to Moody's credit rating downgrade—raising fresh doubts over whether that confidence can endure as debt risks deepen.

The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)—the world’s biggest fixed-income ETF—attracted $2.07 billion in inflows between May 12 and May 16, according to ETFdb.com flow data. This is the largest weekly haul since November 2024 and the second biggest since June 2024.

Other long-duration Treasury ETFs also recorded notable inflows last week:

The Direxion Daily 20-Yr Treasury Bull 3x Shares (NYSE:TMF)—which offers triple-leveraged exposure to 20-year Treasury bonds—attracted $470 million, its largest weekly inflow since November 2024, signaling a surge in leveraged bullish bets on long-term rates.

Meanwhile, the PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (NYSE:ZROZ) pulled in $32.8 million, marking its strongest week of inflows since January 2025.

The timing is notable: the surge in demand preceded Friday's Moody's downgrade, which cut the U.S. sovereign rating to Aa1 from Aaa, citing chronic deficits, rising debt servicing costs, and a bleak fiscal outlook heading toward deficits near 9% of GDP by 2035, should the Tax Cuts and Jobs Act be extended.

Still, year-to-date long-dated Treasury ETFs have seen more outflows than inflows. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) witnessed $1.2 billion in outflows, positioning 2025 to potentially become the first year of net withdrawals since 2020.

Tariff Truce Sparked Optimism, Reduced Recession Odds

Part of the inflows into long-dated Treasuries may have been fueled by a major U.S.-China trade breakthrough, with both sides agreeing to slash tariffs by 115 percentage points—a move that sparked a rally in risk assets and lowered perceived recession risks.

Last week's economic tone was notably risk-on – bolstered by two cooler-than-expected inflation reports – and investors, anticipating stability in interest rates and soft-landing potential, re-entered duration trades in Treasury markets. Long bonds typically perform well when growth fears ease and the market sees room for rate cuts.

Moody's Downgrade Adds Tension—But No Panic

Despite the downgrade, the market response was measured on Monday. The 30-year Treasury yield briefly spiked above 5% on Monday before falling back to 4.92% as demand resurfaced.

The TLT ETF inched 0.3% lower, signaling that while sentiment slightly weakened, there was no panic selling.

"Friday’s U.S. sovereign downgrade by Moody’s is unlikely to result in forced selling but may worsen UST sentiment," said Bank of America analyst Mark Cabana in a note.

Yet, several analysts across Wall Street have largely downplayed the immediate impact of the downgrade.

Further, regulatory frameworks—such as the Basel III capital standards—continue to treat U.S. Treasuries rated AAA to AA- as risk-free for capital requirement purposes.

This means banks and institutional investors face no changes in how they treat U.S. government bonds, reinforcing the structural role Treasuries play as collateral and liquidity instruments globally.

The appetite for duration remains intact—for now—but whether investors continue pouring in as fiscal risks take center stage remains to be seen.

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