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What’s Driving Flows Into U.S. Long Tenor Government Bond Funds

Written By

Dan Buckley

Written By

Dan Buckley

Dan Buckley is an US-based trader, consultant, and analyst with a background in macroeconomics and mathematical finance. As DayTrading.com's chief analyst, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds. Dan's insights for DayTrading.com have been featured in multiple respected media outlets, including the Nasdaq, Yahoo Finance, AOL and GOBankingRates.

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Updated

Jun 25, 2025

We have seen a rebound in inflows into U.S. long tenor government bonds in May after a selloff in the previous month. Let’s find out why and consider what could happen in the coming months.

What’s Driving The Rebound Into Duration?

1. Dovish Fed signals – Multiple Fed officials (e.g., Michelle Bowman and Christopher Waller) signaled openness to rate cuts as early as July, indicating that inflation may remain contained and warrant easier policy. A July rate cut is priced into the market as a 21% chance for now and increases to 87% by September.
2. Cooling inflation and softer growth – We’re now firmly expected to be in a cutting cycle. There is virtually no probabilistic pricing of rate hikes in the near-term curve. This causes investors to move toward long-duration Treasuries when the rate structure has a downward bias.
3. Geopolitical safe-haven flows – Mild geopolitical tensions increased demand for US Treasuries, though the Fed’s tone is driving yields more than geopolitics.

The inflows indicate that investors anticipate a slowing nominal growth rate.

Specifically, buying long-duration funds suggests they expect:

• Lower rates ahead, possibly starting around September 2025 (some possibility of July).
• Soft landing risk – Markets see a base case of economic cooling without sharp recession.

Is this a tactical shift following April’s selloff, or the beginning of a more strategic allocation to duration?

Likely both:

• Tactical – April’s selloff (tariffs and concerns over long-term debt) created a dislocation and attractive entry points.
• Strategic – The persistence of dovish signals, subdued economic forecasts (e.g., Fed cut expectations, GDP forecasts revised down), and repositioning by institutional investors hint at a longer-term reallocation.

May’s inflows likely began as more opportunistic but are gradually becoming part of a broader, strategic duration tilt.

Do I expect inflows into long-duration bond funds to continue, plateau, or reverse in the coming months?

Likely points toward plateauing or moderating inflows:

• As Fed guidance solidifies (likely delaying cuts until fall), momentum could slow. May saw big moves; follow‑through could be more subdued.
  Potential reversal risk:
• Longer-dated Treasuries may lose appeal if inflation ticks up again. Longer-term there’s a fiscal imbalance in the US. Either rates need to stay high enough to incentivize buying this debt – of which there will be a lot more of with deficits where they are – or rates stay artificially low from the Fed buying any excess, which involves trade-offs of inflation and currency weakness (all else equal).
• If growth surprises unexpectedly strong, short-term bond funds or risk assets may benefit instead.