Can You Buy U.S. Treasuries When the Fed Cuts Rates?

Generally, when the Fed cuts rates, U.S. Treasury yields drop, which causes Treasury prices to rise. This leads many investors to buy Treasuries, with one of the most famous being the 20-year TLT.

Some investors, with a more speculative approach, buy 3x leveraged long Treasury ETFs.

First, we need to understand what influences Treasury prices. Interest rates are, of course, a key factor. Another is inflation. Simply put, the higher the inflation, the higher the market demands for Treasury yields, which lowers Treasury prices.

Looking at the current situation, the Fed cutting rates by 50 basis points in September. The market has already priced this in, so holding Treasuries is more about betting on further rate cuts in December and through 2025, while inflation remains moderate. The logic behind this seems sound.

However, 3x leveraged long bets are not as certain.

Leveraged ETFs experience decay over time. If the Fed doesn’t cut rates quickly or aggressively, the market fluctuations could lead to significant losses through this decay.

If the market is front-running the rate cuts, you might be buying at a peak. After the actual cuts happen, along with the decay from volatility, you could face steep losses.

Take March 2020 as an example. With unlimited QE and rate cuts, the blue line representing the 3x leveraged Treasury ETF spiked significantly, but starting in April, it continuously declined due to volatility. By March 2022, as the Fed began hiking rates, it fell even further.

Conclusion:
Leveraged ETFs are only suited for fast and aggressive rate-cut environments, not for long-term holding. Buying into 3x leverage now could result in losses from buying at the peak. It’s safer to stick with regular Treasuries.