In interest rates have risen since hitting an all-time low in the Covid crash of 2020, largely due to higher inflationary pressures, and have helped to drive down bond prices. Now that rates are back near levels last seen in 2018 and the Fed has just updated its forecast for rate hike plans, could traders start to see near-term opportunities in this? oppressed asset class?
A Flight-to-maybe Swap
Treasury bills tend to perform better during periods of high stock market volatility and slow economic growth because they are essentially a legal contract with the US government that promises to repay the lender. This presumably makes bonds a safer and more conservative asset class than stocks. However, Treasuries are far from a guaranteed trade, and a sharp rise in inflationary pressures can be a major headwind for this asset class. For traders looking to position themselves for a high inflation bearish environment for bonds, Direxion offers the Daily 7-10 Year Treasury Bear 3x Stocks (Symbol: TYO) fund, which tracks 300% of the daily downside exposure to the ICE US Treasury 7-10 Year Bond Index.
Below is a daily chart of TYO as of May 19, 2022.
Performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and the principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; actual performance may be lower or higher than stated performance. For the most recent month-end performance, visit Direxion.com. For standardized performance Click here.
Fed to the rescue?
In response to rapidly evolving inflationary pressures that are reaching multi-decade highs, the Fed embarked on its most aggressive monetary tightening cycle in years. Despite being behind the curve, their goal with the rate hike is to contain inflation. The theory is that higher yields can increase global capital flows into the US dollar, which can then put downward pressure on commodity prices. If commodity prices fall, inflationary pressures will also decline. It’s worth pointing out, however, that the US dollar and commodities have rallied over the past few months, so the jury is out on whether this will work. But these policies need time to take effect, and for traders who believe the Fed will succeed in reducing inflation, which could turn into a tailwind for bonds, Direxion offers the Daily 7-10 Treasury Bull Shares 3x (Symbol: TYD) fund, which tracks 300% of the daily upside exposure to the ICE US Treasury 7-10 Year Bond Index.
Below is a daily chart of TYD as of May 19, 2022.
Performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and the principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; actual performance may be lower or higher than stated performance. For the most recent month-end performance, visit Direxion.com. For standardized performance Click here.
Beware of an artificial recession
The verbiage stated by the Fed seems to have gone from a “soft landing” to a “safe landing”. While these may be semantic puns, they are key clues as to how the Fed can handle what increasingly appears to be an economy heading towards stagflation (low economic growth, high inflation) . If they go all-in and sacrifice growth to keep inflation in check, we could be looking for even bigger bond market moves at the longer end of the yield curve. Direction’s Daily 20+ Year Treasury Bull 3x Shares (Symbol: TMF) The fund, which tracks 300% of the daily upside movement of the ICE US Treasury 20+ Year Bond Index, may provide an opportunity for traders. But if inflation starts spiraling out of control, Direxion Daily 20+ Year Treasury Bear 3x Shares (Symbol: TMV) fund, which tracks 300% of the daily bearish movement of the ICE US Treasury 20+ Year Bond Index, could give traders a way to capitalize on a sustained bond market rout.
Top Trading Catalysts to Watch
Traders in the volatile Treasury market keep themselves informed of the following short-term market drivers and catalysts:
- Interest rate surprises: An unexpected decision by the Fed to raise rates above or keep them below what is expected can trigger sharp moves in Treasuries prices.
- Accelerating inflation: Year-over-year increases, as measured by the consumer price index, will outpace monetary policy decisions by the Fed.
- Unforeseen events: geopolitical events such as more COVID lockdowns in China and the escalation of the Russian-Ukrainian war; or unexpected stock earnings reports can cause Treasury prices to surge in response to stock sell-offs.
- Treasury Yields: Monitoring the relative increase/decrease from historical highs/lows in 2-, 10-, and 30-year Treasury yields.
As with all daily and inverse leveraged ETFs, they can be powerful ways to amplify short-term exposure – but only if you do your due diligence on their underlying holdings, have a thesis of solid investment in the outlook of the Treasury bill market and have a high tolerance for risk.
Leveraged and inverse ETFs pursue leveraged daily investment objectives, which means they are riskier than alternatives that do not use leverage. They aim for daily targets and should not track the underlying index for periods longer than one day. They are not suitable for all investors and should only be used by knowledgeable investors who understand the risk of leverage and who actively manage their investments..
An investor should carefully consider the investment objective, risks, charges and expenses of a Sub-Fund before investing. A Sub-Fund’s prospectus and simplified prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus, call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and simplified prospectus should be read carefully before investing.
Directionxion shares the risks – An investment in each Sub-Fund involves risks, including the possible loss of principal. Each Fund is non-diversified and involves risks associated with the concentration of the Funds’ investments in a particular industry, sector or geographic region, which may result in increased volatility. The use of derivatives such as futures and swaps is subject to market risks which may cause their price to fluctuate over time. Each Sub-Fund does not attempt, and should not be expected to, provide returns that are three times the return of its underlying index for periods other than a single day. The risks of each Fund include the effects of market capitalization and volatility risk, leverage risk, market risk, risk associated with aggressive investment techniques, liquidity risk, counterparty risk , the intraday investment risk, for Direxion Daily 20+ Year Bull 3X shares, the daily correlation with the index /Tracking risk and risk of other investment companies (including ETFs), and for Direxion shares Daily 20+ Year Treasury Bear 3X, Daily Inverse Index Tracking/Correlation Risk, Short and Cash Trading Risks, and Risks Specific to Investing in US Government Securities. A security guaranteed by the United States Treasury or the full faith and credit of the United States is guaranteed only for the timely payment of interest and principal when held to maturity. Market prices for these securities are not guaranteed and will fluctuate. Please see the summary and full prospectus for a more complete description of these and other risks of each Fund.
Distributor: Foreside Fund Services, LLC.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
