20-yr US Treasuries (TMF)

Key Updates

TMF declined 2.01% to $34.45 since the May 29 report, reversing the prior recovery rally as Treasury yields resumed their upward trajectory. The 30-year Treasury yield reached 5.20% on June 3—the highest level since 2007—driven by persistent inflation concerns and mortgage-backed securities hedging flows. The selloff intensifies YTD losses to 7.70% and extends the six-month decline to 11.50%, with the technical relief rally proving short-lived. The investment thesis faces heightened pressure as bond market dynamics shift toward a "higher-for-longer" rate regime, with convexity hedging re-emerging as a structural volatility amplifier and market participants now pricing in potential Fed rate hikes rather than cuts.

Current Trend

TMF remains in a confirmed downtrend with YTD losses of 7.70% and six-month losses of 11.50%. The brief recovery rally documented in late May has been completely erased, with the ETF declining 1.64% in the past day, 1.42% over five days, and 3.46% over the past month. The 30-year Treasury yield reached 5.20% on June 3, representing the highest level since 2007 and a critical psychological threshold. The 10-year yield surged to 4.69%, while the two-year yield now stands 50 basis points above the Fed's target range midpoint. Price action suggests TMF remains vulnerable to further downside as yields continue their structural ascent, with technical support levels from the May 19 low of $31.90 now back in focus.

Investment Thesis

The investment thesis for TMF centers on capturing returns from long-duration Treasury exposure during periods of declining yields or economic uncertainty. However, the thesis faces significant structural headwinds as multiple factors converge to support elevated yields: geopolitical tensions driving energy prices higher, persistent inflation with the 10-year break-even rate at 2.39%, fiscal deficit concerns increasing Treasury supply, and the re-emergence of mortgage convexity hedging as a volatility amplifier. The bond market is pricing a "higher-for-longer" scenario rather than the rate cuts anticipated earlier in 2026, with traders now expecting a potential Fed rate hike by December. Goldman Sachs estimates recent hedging flows added interest-rate exposure equivalent to approximately $40 billion in 10-year Treasury purchases, amplifying market moves during selloffs. With over $2 trillion of mortgage-backed securities now carrying coupons of 5% or higher and approximately one-third of outstanding mortgage securities trading near par value, convexity hedging represents a structural shift that could sustain volatility and upward pressure on yields.

Thesis Status

The investment thesis has deteriorated significantly since the May 29 report. The anticipated stabilization in Treasury yields has failed to materialize, with the 30-year yield breaking through the 5.20% level and analysts projecting potential increases toward 5.50% or beyond. The shift in Fed expectations from rate cuts to potential rate hikes fundamentally undermines the bull case for long-duration Treasuries. The re-emergence of convexity hedging as documented by Bloomberg represents a structural change in market dynamics that was not fully appreciated in previous analyses. With inflation expectations remaining elevated despite temporary oil price moderation, and fiscal deficit concerns mounting, the thesis faces multiple headwinds that suggest the recent selloff may represent a new equilibrium rather than a temporary dislocation. The weak demand at the recent 30-year Treasury auction at 5% rates indicates investor skepticism about current valuations even at multi-year high yields.

Key Drivers

The primary drivers of TMF's decline center on structural shifts in the Treasury market. Convexity hedging has re-emerged as a significant volatility source, with over $2 trillion in MBS carrying 5%+ coupons requiring active hedging against interest-rate risk. This creates a self-reinforcing cycle where yield increases trigger additional hedging flows that amplify market moves. The 30-year yield reaching 5.20% reflects investor concerns about persistent inflation forcing the Fed to raise rates rather than cut them, with energy price pressures and mounting fiscal deficits supporting a "higher-for-longer" narrative. Geopolitical tensions have pushed oil prices to $4.26 per gallon nationally, though long-term inflation expectations remain anchored at 2.39%. The upcoming jobs report on Friday represents a critical test for the Treasury market, with strong employment data potentially reinforcing expectations for Fed tightening. Market positioning has shifted dramatically, with traders now pricing in a Fed rate hike by March 2027—a reversal from February expectations of two quarter-point cuts.

Technical Analysis

TMF's technical picture has deteriorated following the failed recovery rally. The ETF broke below the $35.15 level established on May 29, declining to $34.45 and erasing the entire 5.81% gain documented in the previous report. The price action suggests the May rally represented a technical relief bounce rather than a trend reversal. Key support remains at the May 19 low of $31.90, representing a 7.40% decline from current levels. Resistance has been established at the $35.15-$35.40 range, which now represents overhead supply. The consistent pattern of lower highs and lower lows throughout 2026 confirms the downtrend remains intact. Volume analysis in related instruments shows significant bearish positioning, with TLT experiencing over three times average daily volume and a put-to-call ratio favoring puts by 380,000 to 240,000 contracts. The one-month decline of 3.46% and accelerating daily losses of 1.64% suggest momentum remains negative, with no technical indicators suggesting an imminent reversal.

Bull Case

• Anchored inflation expectations: Despite oil prices reaching $4.26 per gallon, the 10-year break-even inflation rate remains at 2.39%—only 10 basis points higher since February—suggesting bond investors expect inflation pressures to be temporary, which could limit further yield increases. Source: Morningstar
• Attractive absolute yield levels: With 30-year yields at 5.20% and analysts projecting potential increases toward 5.50%, current levels may represent emerging value opportunities for long-term investors, as Goldman Sachs has identified, though the firm recommends caution. Source: Bloomberg
• Equity market vulnerability: Rising Treasury yields pose significant risks to the stock market, which is up 27% year-over-year, potentially triggering a rotation into bonds if equity valuations compress due to higher discount rates and borrowing costs. Source: Morningstar
• Geopolitical resolution potential: The yield surge is partially driven by Middle East tensions and Strait of Hormuz disruptions; successful Iran-U.S. negotiations could trigger a sharp reversal in energy prices and Treasury yields. Source: Fortune
• Momentum-driven overselling: Some analysts attribute the recent yield rise to momentum-driven trading in a thin market environment rather than fundamental shifts, suggesting the move may be technically extended and vulnerable to reversal. Source: Fortune

Bear Case

• Structural convexity hedging pressure: Over $2 trillion in MBS now carry coupons of 5%+ with approximately one-third trading near par value, forcing investors to rebalance hedges more frequently and creating sustained selling pressure equivalent to $40 billion in 10-year Treasury exposure during recent selloffs. Source: Bloomberg
• Fed policy reversal expectations: Market participants now price in a potential Fed rate hike by December 2026 rather than the previously anticipated cuts, with the two-year yield standing 50 basis points above the Fed's target range midpoint, fundamentally undermining the bull case for long-duration bonds. Source: Reuters
• Persistent inflation and energy price pressure: Oil prices at $4.26 per gallon and geopolitical tensions disrupting supplies through the Strait of Hormuz support elevated inflation expectations, with some forecasts suggesting the next CPI report could reach 4%, forcing the Fed to maintain restrictive policy. Source: Bloomberg
• Fiscal deficit concerns and supply pressure: Growing U.S. fiscal deficits are increasing Treasury supply at a time when investors are demanding greater compensation for holding longer-maturity debt, with weak demand evident at the recent 30-year Treasury auction at 5% rates. Source: The New York Times
• Analyst projections for higher yields: Two-thirds of investors surveyed by Bank of America Research expect 30-year yields could exceed 6% within the next year, while Barclays warns yields could breach 5.5% (last seen in 2004), suggesting significant further downside potential for TMF. Source: Fortune