A Massive Bet on Falling Yields
Pimco’s 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) attracted $123 million in net inflows on Tuesday, the largest daily inflow in the fund’s history. Trading volume reached 5.2 million shares, nearly twice its previous high set in 2024.
The $1.5 billion ETF primarily holds Treasury STRIPS, which separate principal and interest payments into zero-coupon securities. With an effective duration of roughly 28 years, ZROZ is extremely sensitive to long-term yields. A one-percentage-point decline in yields could theoretically lift its price by about 28%.
The ETF jumped 3.2% on Wednesday, its strongest one-day gain since November 2024, although it remains down 5.4% for the year.
Treasury Steps In as Long-Term Yields Rise
The timing was striking. A day after the large inflow, the Treasury announced that it would at least double the size of individual buyback operations targeting 10- to 30-year nominal coupon Treasuries, raising the minimum operation size to $4 billion.
The announcement pushed the 30-year Treasury yield lower, but it did little to erase concerns over inflation, government borrowing and America’s widening fiscal deficit.
JPMorgan Sees Limited Impact
According to Reuters, JPMorgan analysts said the move could immediately ease some borrowing-cost pressure but argued that it does not address the structural forces driving long-term yields higher.
The Treasury market is worth roughly $32.2 trillion, making the buyback operation relatively small in comparison. More importantly, the government still faces a financing gap of more than $3.5 trillion over coming fiscal years, meaning substantial new debt issuance remains necessary.
JPMorgan warned that without meaningful deficit reduction, the impact on long-term yields could be short-lived. Direct market intervention could also increase the risk premium demanded by investors if Treasury operations become less predictable.
Conclusion
For bond investors, the key question is still whether yields can be pushed lower, so that Washington can address its fiscal pressures by keeping long-term borrowing costs elevated.
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